Monday saw a huge, net 11.5%, jump in SFE copper open interest, coupled with a big jump in the copper price. Tuesday has seen SFE prices continue to pick up along the forward curve, however open interest has declined slightly, likely representing a combination of short covering and profit taking. Fig.1 plots the evolution of the forward curve and changes in open interest during this period.
Ultimately however, this leaves two questions: what was the rationale behind Monday’s activity? And was Monday just a flash in the pan or will we start to see sustained activity? Although order books may well be picking up, this is not yet being reflected in the physical markets.
The suddenness of Monday’s move therefore suggests that other factors were behind the move, the most likely being Chinese concerns over the potential for further dollar weakness should the Yuan-Dollar peg remain in place, and the impact this may have on imported inflation.
Interestingly, should the Chinese government allow the Yuan to appreciate against the dollar at some point in the future, then dollar denominated commodities would become cheaper for Chinese consumers, potentially leading to even more buying activity. Looking forward, the impact of fluctuations in the Yuan and government policy in terms of the Yuan peg, will have a real impact on commodity markets.
Unfortunately, for the bears out there, either Rmb/mt way, the impact also looks to be bullish for commodities, with perhaps the only respite coming from a significant deterioration in the Eurozone area and/or weakness in the Euro.
Courtesy: Commodities Research, Standard Bank
