Copper Price Outlook: XCU/USD May Fall As RSI Diverges With Price

The price of copper has long been used as a gauge of world economic growth, with rising prices tending to suggest an increase in global manufacturing and construction.

However, glancing at the most recent manufacturing PMI numbers from the United States (49.8), the Euro-zone (47.4), the United Kingdom (50.1), Canada (47.8) and Australia (51.5) hardly reflects a robust recovery in global manufacturing activity.

Of course, the “forward-looking mechanism” of financial markets may be driving copper prices higher, as developed economies begin to loosen coronavirus-imposed restrictions and fundamental data points continue to trend in a positive direction.

That being said, supply-and-demand dynamics could also be responsible for copper’s 51% surge from the lows of March, as Chinese imports of the ductile metal exploded to record highs last month.

Copper Price Outlook: XCU/USD May Fall as RSI Diverges with Price

Data Source – Bloomberg

Looking at the chart above, it appears Chinese importers tend to maximize copper purchases when prices are relatively low, with a significant drop in demand seen when prices trek higher.

This inverse correlation should be noted by market participants as the recent appreciation may deter uptake, potentially suppressing demand from the world’s biggest buyer and capping the upside for the global-growth proxy.

China purchased $31.7B of copper ore in 2018; Japan came in second with a measly $9.19 billion.

Furthermore, a breakdown in the inverse relationship between supply and price may also concern copper bulls, as the two variables have notably moved in tandem for the last year.

Copper Price Outlook: XCU/USD May Fall as RSI Diverges with Price

Data Source – Bloomberg

Despite Chilean production recovering in recent months price has continued to climb, suggesting that the substantial weakness seen in the US Dollar could be acting as the perfect tailwind for the orange-metal.

So, the haven currency’s fortunes – a function of broad-based market sentiment in recent months - are probably an important consideration along with Chinese demand in shaping copper’s performance.

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