VANCOUVER (miningweekly.com) – Most base metals traded in positive territory on Monday, buoyed by accelerated buying as Chinese investors use commodities as a hedge against the depreciating Chinese yuan renminbi, analysts at UK-based boutique advisory firm SP Angel stated Monday.
Analyst John Meyer argued in a note to clients that Chinese investors were piling into commodities as the US dollar continued to strengthen and China allowed its currency to depreciate against the US dollar.
The yuan had fallen by nearly 6.5% since April against the greenback.
According to Meyer, US president-elect Donald Trump is likely to lower US corporation taxes, bringing US dollars back into the country and rebuilding American infrastructure.
Markets are also factoring in a Federal Reserve rate rise this year and further rises next year, as the Fed moves to issue new treasuries into the market to cover Trump’s spending aspirations. The US Treasury might also need to print new US dollar bills to pay for Trump’s expenditure plans, a move which could reverse US dollar gains and allow the Fed to maintain lower rates for longer, Meyer stated.
“Middle Eastern and Chinese sovereign wealth funds are reported to have been sellers of US Treasuries this year, leaving us wondering who will buy new issues of US Treasuries going forward. The Fed dare not go too far in terms of raising interest rates, as it may damage US growth when coupled with the strong dollar,” Meyer noted.
The impact of a significantly stronger dollar is hurting US exporters and serves to raise the effective cost of US energy production when compared with overseas energy producers. After all, Trump has pledged to help US coal miners.
Meyer noted that copper prices had regained upward momentum on the back of strong demand for infrastructure in China and weaker supply growth. Iron-ore and coal prices are pulling back but remain at high levels, despite China raising rates and margins on futures trading.
Copper prices rose 2.7% over the Friday closing price of $5 427/t to $5 576/t Monday, while aluminium rose 1.8% to $1 715/t Monday. Nickel was up slightly at $11 165/t, and zinc also traded up at $2 586/t.