Copper and Currencies

Copper prices were among the first of the industrial raw materials to bottom. Some investors and economists regard copper as a leading economic indicator even though they are aware of the increase role for fiber optic cables and other substitutes for what some call "red gold". Copper's low was set on Xmas eve and since then has been on a tear, appreciating 77%.

The Chinese stimulus efforts, their stockpiling and arbitrage between Shanghai and London have been cited as the major drivers. Some question has been raised over the sustainability of China's demand in light of the disappointing industrial output figures.

Separately, EPFR Global, which tracks flows into mutual funds, reports that commodity mutual funds took in $352.6 mln in the week ending May 13, to bring the total this year to $4.6 bln and total AUM to almost $32 bln.

In terms of currencies, many observers tend to emphasize gold, but our correlation studies (conducted based on percent change) suggests that typical,so called commodity currencies, like Australian and Canadian dollars and the South African rand have a tighter relationship with copper (than gold).

AUD: Over the past year, the Australian dollar and copper are correlated 51.1% of the time, compared with 15.6% for AUD and Gold. The correlation between AUD and copper has increased to 59.3% for the last two months, whereas the correlation with gold has slipped to 10.8%.

CAD: Over the past year, the Canadian dollar and copper are correlated about 48.3% of the time, while CAD's correlation with gold is 25%. Over the past two months, the Canadian dollar's correlation with copper has increased to 62.1%, while its correlation with gold has slipped below 10%.

ZAR: Over the past year, the South African rand and copper are correlated 41.6% of the time, while its correlation with gold is 11.3%. Over the past two months, its correlation with copper is essentially unchanged (42.5%), while is correlation with gold has fallen to almost 1%.