Copper rallied on Monday after a move by China’s central bank to support the yuan triggered a reversal of bets on lower prices but the mood was expected to stay bearish on concern over demand growth in the top consumer.
Benchmark copper on the London Metal Exchange ended up one percent at $4,375 a tonne. The metal used in power and construction touched $4,318 on Friday, its lowest since May 2009.
China’s central bank on Monday confirmed it was preparing to raise the reserve requirement ratio next week for yuan deposits placed in yuan clearing banks from zero to the normal level.
A weaker yuan means metals priced in dollars cost more and erode Chinese firms’ purchasing power.
“The latest move is an effort to curb speculation and downward pressure on the yuan, so that is positive for copper as weaker yuan suggests demand for imported metal could fall,” Capital Economics analyst Caroline Bain said.
“Any sustained rally will only be possible after the Lunar New Year and associated distortions to data, when a clearer picture will emerge on the state of Chinese physical demand.”
China’s Lunar New Year Holiday runs for a week from Feb. 8.
Traders expect volumes to start dwindling and more short position covering as the holiday approaches.
One trader also said metals could be supported if the US Federal Reserve limits rate hikes.
“There’s a lot of talk that the Fed won’t hike as many times this year as people thought, if that is the case we could see some support for metals,” the trader said.
Market turmoil since 2016 started has prompted several Fed officials to express concerns about how much they may be able to raise rates.
The market will be watching investment and industrial production data for December due on Tuesday for clues as to the potential strength of Chinese demand.
Also a problem for metals overall is high inventories, oversupply and mining companies’ reluctance to cut output and balance the market.
“It will take some time for capex cuts, project cancellations and project closures to result in any significant dents in the excessive inventory piles,” Citi said in a note.
Three-month aluminium rose 0.4 percent to $1,479 a tonne, zinc gained 1.4 percent to $1,496, lead rose 0.7 percent to $1,607, tin added 0.2 percent to $13,325 and nickel added 2.3 percent to $8,590 a tonne.
Traders said news that Australia’s Queensland Nickel had appointed voluntary administrators had raised hopes of more nickel output cuts.