Metals lead commodity gains as yuan strengthens

LONDON - Commodity prices rose for a second day as the Chinese currency strengthened beyond 6.4 a dollar for the first time in 17 years, raising the purchasing power of the world's top consumer of energy and industrial metals.

Metals led the advance on the Standard & Poor's GSCI Spot Index, which gained 0.4 percent to 632.27. Three-month delivery zinc jumped as much as 4.3 percent, the most since May 18, while copper climbed as much as 3.4 percent. Crude oil increased while gold declined.

The yuan strengthened 0.36 percent to 6.3948 a dollar as of 1:47 pm in Shanghai, its biggest jump in nine months, according to the China Foreign Exchange Trade System. It touched 6.3938, the strongest level since the country unified official and market exchange rates at the end of 1993. The central bank's reference rate was boosted 0.27 percent to 6.3991.

"It's now back a little bit to risk-on trade," said David Thurtell, head of metals research at Citigroup Inc in Singapore. The yuan's advance "is definitely good for commodities as that allows China to import more, and it's a sign that the government is confident enough about the strength of domestic demand and cares less about exports", he said.

The Chinese currency was supported by the US Federal Reserve Board's pledge to keep interest rates at a record low and signals that China will use currency gains to help rein in inflation.

The International Monetary Fund said last month that a stronger yuan would help stabilize the global economy, as well as aid government efforts to tame inflation and rebalance the nation's growth toward domestic demand and away from exports.

Commodities rallied in eight out of 10 years through 2010, driven by demand in China, where urbanization and population growth spurred use of coal, grains and metals.

Above-target consumer prices have forced policymakers to increase interest rates and banks' required reserve ratio (RRR) to rein in the growth, adding to investors' concerns about a global slowdown as governments in the US and Europe battle with increasing debt.

China may adopt "targeted easing" in the second half to support financing for agriculture, small business and public housing, the China Securities Journal reported on Thursday.

The People's Bank of China has increased interest rates five times since September and boosted major lenders' RRR to a record 21.5 percent.

Chinese copper imports expanded 9.5 percent to the highest level since January last month, according to customs data. Still, they were 11 percent lower than 342,901 tons a year earlier.

Copper, gold

Copper for delivery in three months gained 3.2 percent to $8,870 a ton on the London Metal Exchange, paring the month's loss to 9.8 percent. The contract closed on Wednesday at the lowest since December because of concerns the growth outlook will worsen.

Standard & Poor's cut the US long-term credit rating by one notch to AA+ after a political impasse over the debt crisis.

Many investors are holding a lot of cash and looking for the right time to get back into the financial markets, Thurtell said. "It's not a repeat of the second half in 2008. It's going to be tough but we'll muddle through."

Immediate-delivery gold dropped as much as 0.8 percent to $1,779.20 and traded at $1,785.65. The metal earlier rallied as much as 1.2 percent to a record $1,814.95 on concern economic growth is stalling.

Higher margins

Gold's loss on Thursday came after CME Group Inc, the world's largest futures market, raised margins on gold contracts 22 percent with effect from the close of business on Thursday, prompting investors to sell the metal after a four-day rally.

"We did see a little bit of a sell-off just after the announcement," Darren Heathcote, head of trading at Investec Bank (Australia) Ltd, said from Sydney. "At the end of the day there's overwhelming upward pressure on gold because of the uncertainties in other markets."

Crude for September delivery increased 0.6 percent to $83.40 a barrel in electronic trading on the New York Mercantile Exchange. It earlier dropped as much as 2.1 percent to $81.14.

Corn and soybeans gained in Chicago ahead of a US Department of Agriculture report was likely to show the agency cutting its estimates of the nation's harvests as hot weather curbs yields.

Corn for December delivery advanced 0.6 percent to $6.925 a bushel on the Chicago Board of Trade and soybeans increased 1.3 percent to $13.1875 a bushel. Wheat for December delivery gained 0.5 percent to $7.23 a bushel.

Bloomberg News

(China Daily 08/12/2011 page17)