Silver strategy: White metal may rise to Rs 93,400; Support at Rs 90,300

Performance

Spot silver surged to a two-week high on Thursday on the Fed rate cut bets coupled with a somewhat unexpected rate cut by the Swiss National Bank that cut interest rates for the second straight time. 

Weaker-than-expected US data also boosted silver prices as rate cut probability rose. Market participants expect the US Fed to follow the Swiss National Bank sooner than later amid contained inflation and weak macroeconomic data, though occasionally the data have thrown upside surprises, too. Although the US yields and the US Dollar Index firmed up, spot silver surged to $30.78 on Thursday, its highest level in almost two weeks. Spot silver was trading at $30.74, up 3.40 per cent on the day, at the time of the MCX closing. The MCX July contract was at Rs 91,647 (LTP), up 2.43 per cent.

Weakness in the Rupee

The domestic currency fell to a record low on the strength in the US Dollar Index. Weakness in the Indian Rupee also boosted the silver prices on the MCX. The USDINR pair was trading at Rs 83.64 in the NDF market at the time of the MCX closing. 

Data and event round up

Today, three major central banks delivered their monetary policy decisions. In an unexpected move, the Swiss National Bank lowered borrowing costs for the second straight time on Thursday as the Central Bank slashed the key rate by 25 bps to 1.25 per cent. The Bank battles strong Franc amid low inflation, so it opted for cutting rates. 

The Bank of England kept its rate unchanged at a 16-year high of 5.25 per cent on Thursday with a 7-2 vote of the Monetary Policy Committee (MPC) as 2 members voted for a rate cut. Governor Bailey cited the need to ensure more confidence before a rate cut. It seems that the Bank of England won’t be cutting rates before November due to high services inflation, though market participants do hope for a cut in August. 

China’s Central Bank also kept its benchmark rate unchanged at its monetary policy meeting held on Thursday. US data released on Thursday were disappointing. US initial jobless claims came in at 238K, around ten-month high, Vs the forecast of 235K, whereas continuing claims rose to 1828K from 1813K and topped the forecast of 1810K. Housing starts (May) at 1277K trailed the forecast of 1370K, which was the slowest pace in the last four years. Even building permits (May) at 1386K fell short of the expectation of 1450K. The Philadelphia Fed Business outlook (June) stood at 1.30, which was again well short of the forecast of 5.

Dollar and yields

The US Dollar Index was at 105.64, up 0.37 per cent on the day at the time of the MCX closing. The tend-year US yields at 4.25 per cent were up 0.42 per cent.

Fed rate cut probability

Markets are currently assigning a probability of 65 per cent to the event of a rate cut at the upcoming Fed meeting on September 18, according to the CME Group's FedWatch Tool.

Green Energy transition losing momentum

In a report published Tuesday, the World Economic Forum assessed that the global energy transition is still progressing; however, growing geopolitical uncertainty has caused it to lose momentum. It is to be noted that record industrial demand coming on the green energy transition played a pivotal role in pushing up the silver prices to a 11-year high in May.

Fedspeak

Federal Reserve Bank of Minneapolis President Kashkari said that it could take up to 2 years for the Fed to return to its 2 per cent inflation target and rate outlook depends on the path of the economic data.

Outlook

The markets are currently pricing in a probability of 65 per cent for a rate cut in September as traders look for more than one rate cut this year. However, it is worth noting that the markets’ rate cut outlook is somewhat at odds with the Federal Reserve that projected just one rate cut in its recently concluded FOMC meeting. Slowing pace of green energy transition and a possibility of a measured rise in gold prices in near term may also limit the upside in silver. The white metal may rise to $31.35 (Rs 93,400)/$31.50 (Rs 93,900) in the near term. Interim resistance is at $31. Support is at $30.30 (Rs 90,300)/$30 (Rs 89,400) /$29.65 (Rs 88,300). Buying the dips preferred unless the Fed softens its hawkish stance, or the US data disappoint yet again.  

(Praveen Singh is an associate vice president of fundamental currencies and commodities at Sharekhan by BNP Paribas. Views expressed are his own.)