Copper futures pare losses on Chicago PMI, stronger dollar weighs

Copper futures traded lower throughout the day on Thursday on a stronger U.S. dollar after FOMCs after-meeting announcement spurred speculations the Federal Reserve may begin scaling back its bond purchases earlier than previously projected. The industrial metal however pared daily losses after data showed business activity in the Chicago region expanded in October at the fastest pace in 2-1/2 years.

On the Comex division of the New York Mercantile Exchange, copper futures for settlement in December traded at $3.309 per pound at 14:42 GMT, down 0.50% on the day. Prices shifted in a days range between $3.320 and $3.292 per pound respectively. The metal added 1.2% on Wednesday but trimmed its weekly advance to 1.1% on Thursday and is set for its first monthly decline in four.

Copper fell on speculations the Federal Reserve may decide to trim its bond purchasing program earlier than predicted, which boosted the U.S. dollar to a two-week high. The U.S. dollar index rose by 0.58% to 80.24 by 14:42 GMT. The U.S. currency gauge jumped to a day’s high of 80.25, the strongest level since October 17, and extended its weekly advance to over 1.2%. Strengthening of the greenback makes dollar-denominated raw materials more expensive for foreign currency holders and limits their appeal as an alternative investment.

The U.S. dollar was supported throughout the day as downbeat data from the Euro zone pressured the euro. The greenback drew further support after the Department of Labor reported that the number of people who filed for initial unemployment benefits in the week ended October 26 fell by 10 000 to 340 000, slightly underperforming the median estimate of analysts surveyed by Reuters for a drop to 339 000.

A Labor Department analyst said that California cleared its backlog of applications which caused distortions in numbers since September following a computer system change in the state.

Today’s data added to policy makers’ overall sentiment that the U.S. labor market and economy as a whole are still fragile and need to recover further but an underlying strength was notable. Fed officials seemed less optimistic about economic growth on Wednesday, and especially worried about the recovery of the housing and labor markets, pledging to maintain the current $85 billion per month bond purchasing pace until “the outlook for the labor market has improved substantially.”

However, policy makers noted there were signs of “underlying strength” in the economy and kept a tone which left the 16-day government shutdown in October and the possibility for a U.S. debt default on the sidelines, shifting focus to upcoming key data points. According to a Bloomberg survey of 40 analysts conducted on October 17-18, the Fed will begin scaling back its bond purchases in March. However, according to Citigroup, the odds for tapering in January rose to 45% from 25% after FOMC’s after-meeting statement.

William Adams, head of research at Fastmarkets.com in London, said in a note today, cited by Bloomberg: “The net takeaway from the announcement was that tapering of QE might start sooner than the market had come to believe.”

The industrial metal was also pressured by speculations for rising supplies. Chinas copper output rose by 21% to 620 000 tons in September from a year ago. Meanwhile, analysts surveyed by Reuters earlier in October expected the copper market to mark a surplus of 182 000 tons this year, up from a previous estimate of 153 000 tons, followed by a surge to 328 000 tons in 2014.

Inventories tracked by the London Mercantile Exchange rose to 476 150 tons today, bourse data showed. This was the first rise since September 4 but stockpiles are still up 49% this year.

Chicago PMI

The metal however drew some support after data showed manufacturing activity in the Chicago region expanded in October at the fastest pace in two and a half years as orders and production surged. The Chicago Purchasing Managers Index surged to 65.9 from 55.7 in September, confounding analysts projections for a drop to 55.0. This was the highest level of activity since April 2011 and the biggest increase in more than three decades. Orders rose to the highest level in nine years.

Ryan Sweet, senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, commented for Bloomberg: “Manufacturing in the Midwest is getting a lift from autos, which have been a driving force for manufacturing over the past year or so. Still, anytime you get a big swing of this magnitude, you always want to take it with a grain of salt, particularly with the slowing in the domestic economy and the heightened policy uncertainty.”