Iron Ore has fallen sharply over recent days and Copper has joined the rout this week, losing more than 5% so far this week.
While the focus here in Australia has been on Iron Ore, the collapse in Copper is more telling for what it says about the shift in global sentiment after the weak Chinese export data over the weekend.
For decades now, market participants have called Copper “Dr. Copper” or referred to it as “the Commodity with a Phd.” because it seems to be so ubiquitous throughout the global economy. The underlying premise is that where goes Copper, so goes the global economy.
So the weakness in Copper and commodities more broadly is a clear sign that the worm has turned in terms of global trader sentiment.
It is also a sign that the Aussie has further to fall, according to Rob Rennie, Westpac’s head of strategy, who wrote in a note to clients yesterday that:
Our attitude towards the AUD is shifting. The wall of worry the A$ will need to climb is getting higher. We have had multiple waves of financial market squeezes in China in 7 day repo, CNY and CNH; we have had the first corporate bond default in China; the atmospherics surrounding iron ore have deteriorated sharply; rebar prices made fresh lows back to 2007 in the last 24 hours. None of this bodes well for the A$ near term.
Turning to the relationship between the Aussie dollar and the Westpac Commodity Index, Rennie says that the Aussie has some catch-up “given the recent fall in the commodity price index. Arguably the divergence between these two series should correct over the medium term, which continues to suggest a sell on rallies approach for the AUD.”
A lower Aussie dollar in the months ahead will no doubt be music to Glenn Stevens’ ears if Westpac is right.