Copper has held up better than gold in last week’s market carnage, which could be a positive long-term indicator, notes Joe Perry.
While gold and stocks had huge selloffs all week, particularly Thursday, one instrument that was able to remain calm under stress was copper. Copper prices have traditionally been a signal to the world as to whether the economy is in good shape or not. If copper prices are going up, that is supposed to signal strength in the economy. If copper prices are moving lower, it signals a weaker economy.
Thursday, while gold closed down more than 3% and the major stock indices were down near 10%, copper was down only 1.2% near $2.428 per lb. and closed near the highs of the session, creating a hammer candlestick formation on the daily chart (see chart). Also notice that the relative strength index (RSI) has been diverging since the first trading day in February. (It best not to follow RSI as a pure technical indicator in volatile markets like these, but it can be helpful when it indicates a divergence).
Source: Tradingview, COMEX, FOREX.com
Now look at Friday’s candle, a bullish engulfing candle, with price currently up 1.7%. If copper prices closed near current level, this will be a bullish signal for not only copper, but for the economy in general.
As with gold, copper usually trades inversely with the U.S. Dollar Index. However, notice as of late that the correlation coefficient has been positive. The dollar and copper have been trading in the same direction. This may be a temporary correlation, but traders should take note of it. Perhaps copper, given its long-term value, is being seen as a safe haven. Economic conditions are weakening because consumers are stepping back from participating in public facing activities. However, longer-term this should not affect housing and auto demand. This makes copper a longer-term gauge on economic health.
Source: Tradingview, COMEX, FOREX.com
This correlation may give us some insight into other currencies as well, such as EUR/USD, which makes up 57% of the Dollar Index (DXY). Notice the EUR/USD and copper are inversely correlated. This should be expected as the DXY is positively correlated. As copper trades lower, so should the EUR/USD.
Source: Tradingview, COMEX, FOREX.com
In the short-term, traders should be watching the correlation between copper and US dollar. It may provide a clue as to where currencies are headed next!
Joe Perry holds the Chartered Market Technician (CMT) designation and has 20 years of experience in the FX and commodities arenas. Perry uses a combination of technical, macro, and fundamental analysis to provide market insights. He traded spot market FX and commodity futures for 17 years at SAC Capital Advisors and Point 72 Asset Management.
