Copper, Silver, Commodity Correlations, US Dollar – Talking Points

  • US Dollar strength and market sentiment may dictate the future of copper and silver prices
  • Silver breaking out of Symmetrical Triangle pattern could see prices continue to trek higher
  • Copper remains confined by Ascending Channel although divergence hints at a possible pullback

Year-to-Date Correlations for Silver and Copper

Copper, Silver Driven By US Dollar. Risk Aversion May Fuel Selling

Data Source – Bloomberg

Commodity prices have bounced back substantially since collapsing in early March, benefiting from a combination of stabilizing fundamentals and a weak US Dollar.

However, the re-imposition of lockdown measures in several states in the US, as global cases of the novel coronavirus surge past 10 million, threatens to destabilize the 3-month rally in metal prices.

The negative correlation between the haven-linked US Dollar and the price of copper and silver highlights the sensitivity of commodities to overall market sentiment.

In essence, positivity and certainty drive metal prices higher whilst risk aversion puts a premium on safe-haven assets, discounting the price of silver and copper.

US Dollar Index ** – Haven-Bid Dictates Future Direction

Copper, Silver Driven By US Dollar. Risk Aversion May Fuel Selling

** Note: “US Dollar Index averages EUR/USD, JPY/USD, GBP/USD, AUD/USD

Source – TradingView

The 200-day moving average (1.3130) has halted a potential breakout in the US Dollar, as the haven-linked currency finally pushed higher out of the Descending Wedge pattern extending from March highs.

A bullish break on the Momentum indicator could intensify buying pressure should price hold above the November high (1.3040) and could see USD claw back lost ground against its major counterparts, fuelling the decline in cycle-sensitive commodities.

Should prices clear resistance at the 200-day MA (1.3130) a period of risk aversion may ensue, capping the potential upside for copper and silver prices.

However, inability to hold above the November high (1.3040) could suggest a false breakout, leading USD back to the monthly low (1.2741), which could come alongside appreciation in risk-associated assets.

Silver Daily Chart – Break of Consolidation Could Ignite Further Buying

Copper, Silver Driven By US Dollar. Risk Aversion May Fuel Selling

Source – TradingView

The recovery in silver prices has been nothing short of remarkable. They have climbed as much as 58% from the 12-year low set on March 18 (11.64) to wipe out prior 2020 losses.

Resistance at the 2013 downtrend proved a step too far for the dollar-sensitive metal as a fresh burst of risk aversion propelled price back to the 200-day moving average (16.88), slicing through the 12-week uptrend from the March low (11.64).

Despite the temporary pullback, silver continues to remain constructive above the 78.6% Fibonacci (17.31) with a topside break of the 2020 open (17.83) and Symmetrical Triangle resistance hinting at further upside to come.

Development of both technical indicators reinforce the bullish price action seen over the last week of trade as the RSI tracks its 12-week uptrend and the Momentum indicator accelerates away from 8-week support.

A close above resistance at the June high (18.38) may validate the topside break of the Symmetrical Triangle pattern, leading to price possibly accelerating through the February high (18.94) to an implied measured-move objective just shy of the psychologically imposing 20-handle (19.61).

However, the metal’s sensitivity to the US Dollar may ultimately cap gains as the weakening fundamental backdrop may result in a surge of risk aversion, putting a premium on the haven-associated Greenback and discounting sentiment-sensitive commodities such as silver.

To that end, failure of price to hold above the 2020 open (17.83) could intensify selling pressure, resulting in a sharp decline back to supportive regions at the 78.6% (17.31) and 23.6% Fibonacci’s (16.79).

Change in Longs Shorts OI
Daily4%33%8%
Weekly-2%33%2%

Copper Daily Chart – Ascending Channel Holds…for Now

Copper, Silver Driven By US Dollar. Risk Aversion May Fuel Selling

Source – TradingView

Although copper has recovered substantially from its lowest levels since 2016, the brown metal has continued to lag its silver and gold counterparts, as the continued climb in global coronavirus cases dampens the outlook for global growth.

Despite the fragility of the economic recovery copper prices continue to track within an ascending channel, that has supported the growth proxy in its 38% recovery from the yearly low (1.9671).

However, the divergence of both the RSI and Momentum indicators with price highlight a degree of exhaustion in the recent rally from the 200-day moving average (2.5521) as copper approaches key resistance levels at the November 2019 high (2.7268) and 2020 open (2.7793).

Immediate short-term direction may be dictated by the RSI as it flirts with overbought territory for the second time this year. Failure of the oscillator to jump back above 70 could signal a potential pullback to the convergence of channel support and the 78.6% Fibonacci (2.679).

With the February high (2.6262) acting as the line in the sand for would-be buyers, a close below may signal a resumption of the primary downtrend with key downside hurdles falling at the 200-MA (2.5521) and 61.8% Fibonacci (2.5550).

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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