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UPDATE: Asian Commodity Markets Sanguine On China Rate Rise
* OCTOBER 19, 2010, 11:10 P.M. ET
By James Campbell
Of DOW JONES NEWSWIRES


SINGAPORE (Dow Jones)--Asian commodity markets were steady in early trade Wednesday, with some dip buying activity evident despite China's surprise move to tighten monetary policy late Tuesday.

On the London Metal Exchange, copper prices were fluctuating around yesterday's kerb, while aluminum was in positive territory. Gold, silver and palladium were also making slight gains alongside crude oil, indicating sentiment among commodity traders and investors remains reasonably firm.

"Short term, this has sparked some profit-taking, but that's all it is," Mark Pervan, a commodity analyst at ANZ Bank in Melbourne, said.

The People's Bank of China said Tuesday that it will raise the one-year yuan lending rate to 5.56% from 5.31%, and the one-year yuan deposit rate to 2.5% from 2.25%.

LME three-month copper fell 2.2% Tuesday and spot gold was down 2.5%, while Nymex November light, sweet crude oil fell 4.3% after the U.S. dollar rallied on the news, and the consequent reduction in risk appetite.

Pervan said the policy decision should be seen in the context of China's economic growth, which is still above trend. China's third-quarter gross domestic product likely grew 9.5% on year according to a Dow Jones Newswires survey of economists, down from 10.3% in the April-June period. The data, as well as data on third quarter inflation, are due Thursday at 0200 GMT.

"The takeaway from this is that China is taking a proactive stance to keeping control of its economy, and that has to be a good thing for commodities if it ensures a sustainable growth path in the future," he said.

The timing of the policy suggests China's forthcoming data will be strong, Jonathan Barratt, managing director at Commodity Broking Services in Sydney, said.

However, he said the correction in commodities is likely to be deeper than the current price action suggests.

"I think you could easily see copper correct 10%, 15% or even 20% from current levels."

Judging by inventory data, demand at the margin for commodities like copper and crude is weaker than the recent price action suggests, and the long-commodities, short-dollar trade has been made on borrowed time, he said.

"People are realizing that (potential further U.S.) stimulus should not equal a weaker dollar," he said.

A metals trader at an LME brokerage in Hong Kong also said the mild response to the policy move from bellwether commodities in Asia shouldn't necessarily be viewed as a positive sign.

"The Chinese are not very long LME copper and have not been long for a while, so you would not expect a big reaction," he said.

Continued dollar strength could lead to more selling in London later as funds, the major drivers of copper's 17% rally since late August, take more profit, he said.



-By James Campbell, Dow Jones Newswires, [phone]; [e-mail]