(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
The rising U.S. dollar threatens to push down copper prices by about 8% in the coming months, according to a technical analysis, after a rally that pushed up the price of the metal by 11% over the past year.
Copper trades in dollars and tends to decline when the U.S. currency strengthens. That's because it takes fewer dollars to buy the same units of copper. The outlook for declining copper prices spells trouble for two copper mining stocks, Freeport-McMoRan Inc. (FCX) and Southern Copper Corp. (SCCO), whose shares are poised to fall 15% in the coming weeks, technical charts indicate.
Copper and the Dollar
Copper prices are nearing a technical breakdown, and should the price of copper fall below $2.90, a technical support level, it could fall to $2.69, a drop of 8.2%, from its current price of $2.91. The relative strength index (RSI) for copper has also been trending lower, suggesting momentum has been coming out of copper.
At the same time, the dollar is nearing a big breakout, and should the dollar index, a measure to value the dollar against a basket of foreign currencies, rise above 95.5, it could rise towards 100, an increase of nearly 6% from its current level of 95.1
Freeport's stock is resting on a technical uptrend, and should copper prices experience a breakdown, Freeport's stock is likely to follow. Should Freeport's stock fall below the uptrend, it would likely send the stock down to technical support at $13.40, a drop of roughly 22.3% from its current price of $17.25. The RSI has also been trending lower as well, suggesting momentum is moving out of Freeport's stock.
Southern Copper stock has already fallen below a critical uptrend and finds itself sitting just above a significant support level at approximately $44.80. Should the stock fall below support at $44.80, it too could fall to the next level of technical support around $38.45, a drop of about 18%. Like Freeport, the RSI for Southern Copper is also trending lower and would also suggest momentum is leaving the stock.
Should the dollar continue to strengthen, it would undoubtedly be a big negative for the price of copper, while a decline in copper would be negative for both Freeport and Southern Cooper.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.