Strong Dollar & Copper: Will The Dollar Get Stronger

Strong Dollar?

Updated Aug 2024

The idea of the dollar “dying” is absurd, but its strength is also an illusion—it’s essentially a game of musical chairs. All currencies are depreciating, but the dollar will appear to appreciate simply because it depreciates at the slowest rate. It’s like having 1,000 idiots in a room; one of them is told he’s a genius compared to the others. Is he truly a genius, or just another idiot who thinks he is?
The dollar is setting up for a move to 110 and beyond, possibly even surging to new highs. However, the paradox is that commodities will likely continue to rise.

Oil Outlook

The outlook for oil is improving, with early signs suggesting it could potentially trade much higher, possibly testing the $120+ range. Let’s focus on the $99 to $101 range. The immediate challenge is for oil to trade above $87 for three consecutive days or close above this level on a monthly basis. If this hurdle is cleared, the $99 to $101 target comes into view. Should this scenario materialise, we will reevaluate higher targets. As it stands, if the current pattern holds, there is approximately a 60% chance that oil could test the $120 range.

If the above comes to pass then many of our energy stocks should take off.

Copper

China’s November copper imports reached 528,000 tons, the highest in a year, and there was a 4.3% increase from October, driven by robust demand, declining inventories, and increased shipments from Africa. Domestic copper stocks fell to a nine-month low, emphasising supply constraints. In 2024, unwrought copper imports totalled 5.13 million tons (+1.7% YoY), while copper concentrate imports rose 2.2% to 25.6 million tons. With plans to enhance manufacturing via smart production, China could import 232,000 tons in 2025.

These trends show a growing copper supply and demand gap, pointing to a long-term shortage. This makes pullbacks in copper stocks potential buying opportunities. At the same time, China’s new technology is boosting the value of low-grade iron ore, benefiting producers in this space. VALE’s decision to ramp up low-grade iron ore production is a smart move to capitalise on this shift.

To capitalise on these developments, we will introduce two new plays in the copper sector, one today and one at a later date.

Stepping Back in Time

Strong Dollar & Copper: The Technical Outlook

It is said that the economy usually mimics the copper markets. Upon examining the above chart of copper, it appears that the economy and copper are trending in the same direction. Copper is now closer to a bottom than a top; hence, if one takes a long-term perspective, we can infer that the markets are also close to putting in some bottom.

Copper started forming a top formation as early as May 2007, though the accurate correction only began to gather steam around July 2008. It is now showing the first signs of a long-term bottom formation, even though in the short term, it could momentarily spike down to the 105-110 ranges.

The ranges between 141 and 144 have been a strong zone of support for copper. However, once this zone was violated, support turned into resistance. Despite this, copper was able to rally above 144 after briefly dipping into the 125 range. This indicates that this long-term zone of support will likely hold every month, suggesting that copper is closer to setting a long-term bottom than a long-term top.

From a long-term perspective, the current pattern suggests that copper is setting a long-term bottom. Therefore, traders may want to consider taking small positions in some of the key players in this sector. If copper were to trade down to the 110 range, traders should view this as a long-term buying opportunity. A close above 160 would significantly reduce the likelihood of copper trading down to the 110 range.

Copper often puts in a bottom well before the markets, providing an early signal of a potential change in market direction. During the strong correction from 2000 to early 2003, copper bottomed towards the end of 2002, well before the markets and the general economy. Hence, a change of direction in the copper markets could provide the first signs of a turnaround in the markets and possibly the economy.

Do Fundamentals Support A Strong Dollar Outlook

With the massive amount of new infrastructure that both China and India need to develop in the coming years, not to mention the billions of dollars that the Obama administration is allocating for the maintenance and development of new infrastructure-related projects, long-term demand for copper remains robust. Copper recently experienced a significant correction of over 68% in roughly six months but is unlikely to stay at such low levels indefinitely.

Traders looking to capitalize on this trend should consider opening small positions in top players in the sector, like PCU and FCX and using strong pullbacks to add to their current positions. However, it is important to exercise caution and not make impulsive decisions. Money management and patience are key ingredients to success in the markets. Individuals who remain patient and disciplined are usually handsomely rewarded, while those who are rash and greedy usually regret their decisions.

USD Bottom Close at Hand?

Suppose the dollar can meet the two conditions listed below (Dollar targets). In that case, it has a strong chance of testing its previous highs and possibly reaching new highs before undergoing a significant correction that could last until the end of 2009. Typically, a market that experiences a strong rally does not collapse abruptly but rather undergoes a rapid pullback followed by a powerful upward move (blow-off top) and then a more orderly pullback that may lead to new all-time lows.

To establish a short-term upward trend, the dollar must remain above 78.70 and rally beyond 84. This entire pattern may take between three and six months to complete. Traders bullish on the dollar may open long positions using the UUP ETF (dollar bullish ETF) or shorten the Euro through DRR, as the Euro usually moves in the opposite direction of the dollar.

Dollar Targets

As previously mentioned, if the dollar hits 81, it is expected to experience a relief rally that will take it back to the 83.00 range. However, if it fails to do so, it is likely to trade down to the 75-78 range.

In a market update as of December 16, 2008, the dollar had traded as low as 78.77 but has since rallied. For this rally to gain momentum, it must meet two requirements:

A) It cannot close below the previous low of 78.77.

B) It must trade above 84 for three to six consecutive days.

It’s important to note that while a rally may occur, traders should be aware that the dollar’s rally will likely be short-lived and may end the year on a lower note, possibly hitting a new low before the end of the year. As a result, bullish traders should consider closing any positions when the dollar tests its old highs.

It is worth noting that no matter how robustly the dollar rallies in the coming weeks and months, the rally will fail, and the dollar is likely to end the year on a lower note, conceivably reaching a new low before year-end. Therefore, traders who are bullish on the dollar should consider closing all positions when it tests its previous highs. Tactical Investor May 2015