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Yuan strengthens in forex amid rising copper prices

Copper strength signals yuan strength

The correlation coefficient between copper and USD/CNH is -0.83. As long as this correlation is below -0.80, USD/CNH can be used as a proxy for copper in forex.

Copper is often referred to as “Dr. Copper” because it is used to assess the state of the world economy. If the price of copper rises, the world economy is considered to be strengthening. However, if the price of copper falls, the world economy is said to be sick or weakening.

As China continues to open up its economy, traders are expecting demand for the industrial metal to pick up, so the price is rising and cracking down on some key levels along the way!

Over the past 5 trading days, copper has risen from 3.7399 to 4.1607. Along the way, the price traded above the 200-day moving average and the 38.2% Fibonacci retracement level from the March 7, 2022 highs to the July 15, 2022 low.

In addition, copper has overcome the horizontal resistance and 50% retracement of the same time period. If copper continues to rise, the next resistance will be the 61.8% Fibonacci retracement level and the highs from June 3, 2022 at 5.0371.

However, note that the RSI is in overbought territory, indicating that the price may be poised for a correction. If the price reverses, support lies at the previous horizontal resistance at 4.0343, the 27 December 2022 high at 3.9393 and the 200-day MA at 3.8107.

Daily copper price chart

Source: Tradingview, Stone X

Not all traders have access to copper trading. Therefore, you can use a proxy instead. The bottom of the chart above shows the correlation coefficient between copper and USD/CNH.

A value below -0.80 is considered a strong negative correlation. Hence, copper and USD/CNH are strongly negatively correlated. When the price of copper moves in one direction, the USD/CNH pair should move in the opposite direction in forex.

USD/CNH has been declining since peaking at 7.3748 on October 25, 2022. More recently, the pair has been declining aggressively in forex after hitting a short-term high on November 28, 2022 at 7.2459.

The USD/CNH pair then consolidated throughout December. On December 30, 2022, the price fell below the flag and is currently on its way to the flag’s target near 6.6757.

Over the past 5 trading days, the price has broken the 200-day moving average as well as the 50% retracement level from 2022 lows to 2022 highs at 6.8412.

If copper continues to rise and the negative correlation persists, USD/CNH will continue to decline. Next support lies at the 61.8% Fibonacci retracement level of the same period around 6.7152, followed by the 3 June 2022 low at 6.6164.

However, note that the RSI is in oversold territory (just like copper was in overbought territory). This indicates that a correction may be coming. Resistance lies at previous support at 6.8381 and 200-day MA at 6.8743.

USD/CNH daily chart

yuan forex dollar January 11, 2023Source: Tradingview, Stone X

The price of copper has risen in the last 5 trading days. However, some traders do not have access to industrial metals trading. The correlation coefficient between copper and USD/CNH is -0.83. As long as this correlation is below -0.80, USD/CNH can be used as a proxy for copper in forex.

Joe Perry, CMT, FOREX.com » Official site

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Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell any currency contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness and accepts no liability for any direct, indirect or consequential damages that may result from anyone relying to such information.

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