Copper teeters on edge of downtrend, iron ore at key support level

A decent rally in prices of industrial metals like iron ore and copper is unwinding on fears China will slow its rate of economic stimulus. Technical charts show both metals now stand at key points that could signal future price direction.

Copper rods
Source: Bloomberg

The impressive rally seen in the industrial metals space looks to be unwinding as early indications appear to show China will not continue its rate of stimulus into the second quarter. Both copper and iron ore prices are at key points in the charts, with further downside on the cards if support levels are broken.

A slew of recent economic data out of China shows a recent acceleration in China’s activity indicators appears to be levelling off going into the second quarter. Slightly lower manufacturing purchasing managers’ index figures, further declines in imports growth and relatively unmoved consumer price index inflation are all providing fundamental support to the pullback seen in a range of commodity prices. 

Adding to these concerns, an interview published in China’s official newspaper, The People’s Daily, with the pseudonymous ‘Authoritative Person’ (quanwei renshi) sternly criticised the credit-driven growth of the past few months. The article seemingly came from a senior member of China’s leading group on economic and financial affairs, and is a strong indication the good times for industrial metals riding a wave of stimulus may soon be coming to an end.

Commodities are also likely to suffer in a rising dollar environment. The DXY Dollar Index closed above key technical resistance at $94 on May 9. Despite the disappointing non-farm payrolls data on May 6, Federal Reserve speakers have taken a noticeably more hawkish turn of late, which has helped support the dollar. While a rate hike in June is exceedingly unlikely, there is a valid case for the Fed to try and lay the groundwork for a potential hike in September which may be driving its hawkish turn.

Copper has made a fairly clear double top around the $5000 level (indicated by the rectangle), and has now lost over 5.8% in the past week. The price has currently broken through the Ichimoku Cloud, and the Tenkan-sen and Kijun-sen lines, and the two Senkou lines (both circled) are on the verge of key crossover points. A break through $4640 could see copper plunge to its February lows of $4400.

Iron ore has similarly collapsed, losing 20.5% since 22 April, which qualifies it as a technical bear market, coming a mere month after it entered a technical bull market. The Tenkan-sen (blue line) has crossed below the Kijun-sen (red line), a strong reversal signal. The price has moved down dramatically and is resting on a key support level at CNH 383. A close below here is likely to see the iron ore price push down further to CNH 365 and CNH 350, the next levels of technical support.

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