Playing The Copper Price Impact On Forex Markets

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By Chris Shaw

Standard Chartered expects the recent strong upswing in copper prices to stall in the coming six months as the price premium on the Shanghai market looks to be falling on the back of weaker Chinese orders given weaker seasonal demand and as the supply side of the market shows signs of improvement.

But any downturn is not expected to continue too far into the future as the group sees the upward trend in prices resuming in 2010 and remaining above historical average prices for an extended period as the supply side struggles to keep pace with increasing demand, so keeping inventories low.

While such a view has implications for the copper price, and Standard Chartered is forecasting an average price of US$4,750 per tonne in the September quarter, US$4,250 per tonne in the three months to the end of December and US$4,688 per tonne for 2010, it also has implications for the currencies of the major copper producers.

Chile is far and away the world’s top copper producer as it accounts for around one-third of global supply, while Peru produces about 8.1% of global output, the US around 8.5%, China at 6.0%, Russia at 5.0% and Australia at 5.7%. The importance of copper to many economies can also be seen by looking at what proportion of a nation’s GDP its copper output accounts for, and here again Chile is near the top of the list as almost one quarter of its GDP comes from copper mining, well above the one-twelth of GDP for Peru.

Standard Chartered has extended the analysis to include the correlation between the local foreign exchange unit and the US dollar and the copper price to determine those currencies that stand to benefit from higher copper prices, its research showing the Chilean peso is the number one candidate as it has not only a relatively significant correlation but also a relatively stable one. Following are the Zambian kwacha and the Peruvian sol, with all three currencies a chance of appreciating in 2010 if the group’s view on copper prices comes to pass.

For the peso, the group estimates it could appreciate against the US dollar by as much as 4.5% over the next year, which relative to the one-year forward rate implies outperformance of as much as 14%. The kwacha and sol are also tipped for gains of 6% and 8.5% respectively compared to their one-year forward rates.

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