Base metals decline on strong dollar

Indications of interest rate hike earlier than previously expected prompt selloff in metals, marginal recovery seen in short term

Base metals prices declined sharply on Thursday following indications of a hawkish stance by the US Fed and the possibility of a decision on the interest rate hikes in its scheduled meeting in April. If true, it would be a complete reversal in the Fed’s earlier dovish stance, with slower rise in interest rates.

The base metals market took the hawkish indication as a surprise as the US economy continued to show turbulence with frequent change in performance. In fact, the latest data from the Commerce Department showed stronger US economic growth in the fourth quarter of 2015 than previously estimated.

This triggered a broad-based sell-off in metals on a stronger US dollar against major global currencies as investors diverted their funds to US treasury for better returns. The extended weekend also helped bearish sentiment in base metals as trading corporates squared off their positions to show healthy books for the quarter ended March 2016.

“Base metals prices declined sharply on Thursday due to the hawkish stance taken by the US Fed on the economy prompting thereby interest rate revisions in its meeting scheduled in April, the stance which seemed deferred earlier. That has helped strengthened the US dollar against major global currencies,” said Naveen Mathur, Associate Director (Commodities and Currencies), Angel Broking.

Base metals in free fall
	Mar 23	Mar 24	Variation (%)
Zinc	1,855.00	1,777.00	-4.20
Copper	5,060.50	4,931.00	-2.56
Lead	1,795.00	1,755.00	-2.23
Aluminium	1,480.00	1,469.50	-0.71
Nickel	8,625.00	8,580.00	-0.52
Tin	17,575.00	17,625.00	0.28
Source: London Metal Exchange

  Zinc led the base metals fall with a staggering 4.20 per cent decline in Thursday. Profit taking was witnessed in copper albeit cautiously with some optimism over demand in China after traders resume work on Monday. That helped to limit losses ahead of key manufacturing data from the leading consumer of the metal. Little upside can be seen in metals on the London Metal Exchange with gains to limit between $150-200 across all metals.

“Thus, copper prices are likely to remain trade between $5,100-5,100 a tonne,” said Mathur.

Meanwhile, a higher US currency makes dollar-denominated commodities more expensive for non-US firms; a relationship used often by funds to take a final trading call either side i.e. buy or sell. With positive signals from the economy, the dollar rose for a fifth consecutive day against a basket of major currencies, putting it on track for its best run of gains in almost a year as investors moved to price in the possibility of a US interest rate rise next month.

“Initially the Fed meet outcome seemed to suggest one or two interest rate hikes this year leading to a weaker US dollar and a rise in base metals prices across the board. This was contradicted on Thursday by a Fed official who indicated the possibility of additional hikes through 2016. Given the background of low demand from Europe and China along with a resurgent dollar, base metals prices slipped and look unlikely to make up too soon unless both factors reverse. In fact prices of virtually all global commodities including gold and oil fell simultaneously. Traders today would rather sell first and hope to buy back at lower prices,” Jayant Manglik, President (Retail Distribution) Religare Equities Ltd.

Interestingly, the US showed its fourth quarter gross domestic product (GDP) growth at 1.4 per cent, up slightly from the second estimate of 1 per cent. There has been hardly any change in fundamentals as demand of base metals continued to remain subdued from consumer industries.