Yield Curve Inversion Pushes Copper Prices Lower

Copper is an important metal used by billions of people every day. As you read this, there is some copper in your computer or smartphone. The power that you use to charge the devices relies heavily on the metal. Because of this importance, copper is often viewed as a barometer for the global growth. This is because a slowdown would mean a low demand for the metal.

It is for this reason that the price of copper declined sharply last week. As you might observed, there was a yield inversion in the United States. A yield inversion happens when the yield of the short-term treasuries rises above that of the long-term. In a normal environment, holders of long-term bonds require a higher yield because of their patience. It’s a similar way when you provide a soft loan to your friend. If he intends to return the money tomorrow, the interest rate will be lower compared to if he intends to return the funds within a year. You may easily predict what will happen tomorrow but it is almost impossible to predict what will happen within a year. As such, on Friday, the yield of the 3-month bonds rose higher than those of the ten-year.

When such an inversion happens, it is usually a signal that a recession is on the way. In fact, the last time this happened was in 2007, before the financial crisis. After the inversion, stocks declined, the Volatility index rose slightly, and copper declined. This week, there have been some recovery in stocks and copper as investors ponder on what will happen next. In addition, many have downplayed the impact of the inversion. Among them are renowned Economist, Mohamed El-Erian and the chief economist at Citi. They argue that a recession tends to happen 12-18 months after an inversion and between that period, a lot could happen.

After the Friday’s decline, the CPR/USD pair has been moving upwards, although the trend has been largely slow. The pair has risen from a low of $2.8335 to a high of $2.875. As a result of the consolidation, the price is along the 9-day and 26-day moving averages. There is a likelihood that the upward trend will continue a bit to the $2.885 level, which is also the 38.6% Fibonacci Retracement level.

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