Watch out, copper could be a bull trap.
It is easy to get excited when copper makes a large move higher. After all, copper is considered a bellwether indicator for the overall health of the economy. In theory, when copper is in high demand and prices are firm, the economy is on the right track. On the flip side, when copper is struggling to find footing economic growth is likely similarly shaky. Thus, many are viewing the recent copper run as a sign that the economy is firing on all cylinders.
Although the positive correlation between copper and the economy isn’t nearly as distinct as most would like to believe, we can see at least some merit in the theory. Nevertheless, there are other forces at play when it comes to the price of copper that can distort the correlation. For instance, valuation in the US dollar can significantly impact the price of copper with all else on the supply and demand front being equal. In fact, over the previous 30 trading days, copper and the US dollar have closed in opposite directions roughly 89% of the time. In short, as the dollar has fallen to fresh 2017 lows the price of copper has been a direct beneficiary, posting new multi-year highs. In our view, the greenback is likely at, or at least near, an intermediate low. If we are correct about a looming dollar rally, the price of copper should suffer.
