Fed Fears Inflation, Copper Fears Hawkish Fed

Copper futures have closely followed the trajectory of the zigzag that was outlined this summer in the post titled “Copper Fears Recession”. Below is a copy of that monthly chart to refresh your memory.

Copper Futures Monthly

Source: TradingView

The majority of readers bet that the price would remain above $3. Within the same month, the price reached a valley of $3.13 and subsequently recovered. This vote is still valid as the price hasn't crossed that handle yet.

In the next weekly chart update, we will examine the outlook further.  

Copper Futures Weekly

Source: TradingView

This is a closer look at the second red leg down shown on a bigger time frame in the summer. When the first leg up within a bounce in copper futures was unfolding, it looked promising at the beginning.

The hope has evaporated with the second leg up that has shaped a classic “dead-cat bounce” hitting only the minor 38.2% Fibonacci retracement level. It was close to touching the purple barrier of the moving average at the round level of 4, but failed.    

This consolidation after the AB part was called the "BC" segment, and chances are high that was it, especially after the Fed's Chair Powell revealed last week that "17 of the 19 [FOMC members] wrote down a peak rate of 5 percent or more, in the 5 range. So that's our best assessment today for what we think the peak rate will be.” So it would seem another hike or two is in the pipeline.

The Fed still fears inflation rather than recession. The copper futures market is a barometer of the economy, so it reacted immediately. After the Fed hiked its interest rate projection for 2023, the price lost 20 cents by the end of the week.    
According to the RSI, it followed the consolidation path to retest the crucial 50 level. Now, both the price and the market turned south.

The target for the CD segment equal to AB is located at $2.05 where the large red leg 2 is equal to the large red leg 1 in the first chart above. It is an amazing coincidence. Should the Fed throw the economy into recession, the price could fall into the abyss of 2008's Great Recession's valley at $1.25.

The closest volume profile support is located at $3.6. The bigger one is located lower at $2.9 and the largest volume profile sits at $2.6.

The nearest resistance level is the moving average and the 50% Fibonacci retracement level at $4-$4.1. A harder barrier sits at volume profile and 61.8% Fibonacci retracement level at $4.3.

There is another chart that I didn’t show you long ago. A strong distortion was spotted this time, so I want you to see it below.

Copper Futures vs AUDUSD

Source: TradingView

Copper futures (orange) have a strong correlation with the AUDUSD currency pair (green). These two were in amazing sync for more than a decade from 2001 to 2016. The chain was then broken as copper futures showed a terrific gain while the Australian dollar continued to sink.

The divergence reached its peak last summer and is closing now, even as Ozzy dives further down. These days, the corresponding level for copper futures is at $1.75, less than half of the current price of $3.76. The distortion might be solved in the opposite direction as well with the price of AUDUSD reversing to the upside.

However, the chances are low as the real interest rate differential is in favor of the US dollar by a wide margin.         
Possibly we will see a repeat of 1989-2001 when the Ozzy dropped drastically to catch up with copper's low price. Copper may collapse this time to match a weak Australian dollar.   

How deep could copper futures collapse?

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Intelligent trades!

Aibek Burabayev
INO.com Contributor

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.