USD and Copper

Flow

We saw an abnormal volume of flow yesterday at Spectra FX as the market embraces a few themes:

1. AUD higher as CPI takes RBA out of the cutting crew.
2. Short-dated USDJPY downside for intervention.
3. GBP, EURUSD, and CADJPY short covering.

The divergent PMIs, strong Aussie CPI, hawkish Pill (Bank of England), and the MOF staying silent longer than yen longs can remain solvent are all conspiring to take a bunch of popular trades to the woodshed. In terms of new risk, AUDCAD and AUDNZD higher are in vogue.

As discussed a bunch of times over the past few weeks, the global manufacturing rebound seems to be a valid thesis as global PMIs are perky, commodities hold in, and many global equity indices outperform the sagging US bourses. The FTSE, IBEX, and Hang Seng are green over the past month while the S&P is down 2.8% and the NASDAQ has lost more than 4%.

It’s not usually a USD-positive setup when the rest of the world is keeping up with the US, but as long as US yields are pinned to the highs, the USD remains uber-popular. I have been skeptical of recent dollar strength but have been waiting to go short USD because I am concerned that the period from tomorrow to next Tuesday will see large, unconditional USD buying on the back of corporate month end and real money rebalancing.

The chart below gives you a sense of how GBPUSD trades on corporate month end, for example. Over the past 170 months (looking back to 2010), GBPUSD is up 41% of the time on corporate month end and down 59%. That’s a persistent feature of t-2 as many US corps sell foreign currencies and buy USD to hedge global revenues.

Obviously, waiting for the 59% thing can be disappointing a good number of times (41%), but the bar for me to be short USD has to be higher this time of month, especially when stocks are down and that will drive real money USD buying as well. The real money effect has spread out over multiple days now and is not as concentrated on the final minutes of the month’s last WMR fix.

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Copper

I read this story with interest, because I had never heard of the Yangshan copper import premium.

Bloomberg: China Copper Gauge at Zero Offers Stark Warning to Metals Bulls

Here’s the start of the article:

A key measure of Chinese copper demand just sank to zero, another indication that global prices are not balanced with what buyers in the biggest market are prepared to pay.

Premiums paid on imported refined copper extended a months-long decline to reach zero for the first time in Shanghai Metals Market data going back to 2017. The unusually low levels come just days after copper on the London Metal Exchange rallied to a two-year high near $10,000 a ton.

“It’s a sign of extremely weak demand for imported cargoes,” Wang Yingying, analyst at Galaxy Futures Co. said.

Whenever I read an article like this, or one about a golden cross, or bearish death cross, or Hindenberg Omen, or whatever, I am skeptical. Is this just some random observation by a guy somewhere who is just guessing? Or is it real? In this case, it’s easy to backtest, so that’s what I did. The sample sizes are not large, but the results are convincing nevertheless. I filtered for premium below 25 or above 100 to capture the extremes. Here is what the forward returns of LME copper look like.

Forward returns of LME copper when Yangshan copper import premium is at an extreme

And in case you prefer a chart, below I show all the times the metric went below 25 (red) or above 100 (green), with the price of copper on the same graphic. Just to be clear, you will see on the chart that the metric can stay below 25 or above 100 for a while. For the data in the table above, I only use non-overlapping signals. That is, if it’s 23 today and then 20 tomorrow, the 23 triggers the signal, but the 20 doesn’t. Otherwise, you have tons of overlapping signals and the output doesn’t mean much.

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Final Thoughts

Made a slight modification to the USDJPY idea in the sidebar as I wanted to capture month end (so I did a 1-week 152.00 USDJPY put, not a 5-day) but basically the same thing.

Anyone from the MOF be green dot today?

Have a cool day.

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From the paper:

Temperature dissociation of liquids in reusable thermoplastic containers—An eco-friendly scald risk?

good luck ⇅ be nimble