Outlook: MCX Silver can rally to Rs 88,500; focus on US nonfarm payroll

Silver futures had gained 2 per cent in Thursday's trading session amid rise in the US yield.

Slightly softer than expected US CPI data (April) buoyed precious metals with investors discounting increased probability of a Fed rate cut, helped the metal rally to a fresh cycle high of $29.84; however, the rally may be at a risk of a slight correction on somewhat balanced to hawkish Fedspeak and inflationary data on Thursday. The spot silver was trading at $23.65, almost steady, at the time of the MCX closing. The corresponding MCX July contract price was Rs 87,330 at that time, which was up 0.54% on the day. 

Geopolitical watch:

The International Court of Justice (ICJ) will hold public hearings Thursday and Friday on South Africa's request for ordering Israel to withdraw from the city of Rafah. Meanwhile, devastation in Gaza continues with heavy fighting in Jabalya.

 

ETF holdings and COMEX inventory:

Total known global silver ETF holdings fell for the third straight day and stood at 688.22 Moz as on May 15, which is lower than the level seen at the end of the previous week. COMEX silver inventory was seen at 297.839 Moz, lower than the level seen at the end of the last week.  

Data and event round up

The US Philadelphia Fed business outlook, housing starts, and industrial production data trailed their respective forecasts, which could have supported the metal; however, import and export price indices were hotter than expected, which supported a rebound in the US yields and the Dollar index; thus, limiting the gains. Import price Index (April) m-o-m and y-o-y readings came in at 0.90% and 1.10% respectively Vs the respective forecasts of 0.30% and 0.40%.

Similarly, export price index m-o-m and y-o-y were noted at 0.50% and -1% respectively as against the respective forecasts of 0.20% and -1.10%. It is to be noted that most of the US inflation data continue to reflect a sticky inflation scenario. 

Yields and Dollar:

The ten-year US yields were up nearly 0.70% at 4.475% at the time of MCX closing. Consequently, the US Dollar Index was up roughly 0.25% at that time.

Fedspeak:

The Federal Reserve’s Kashkari and Goolsbee tempered some of the rate cut enthusiasm post-US CPI data as they said that rate needs to be higher for longer.  Federal Reserve Bank of New York President John Williams said on Thursday he doesn't see the need for a rate cut in the near term. Mester also argued in favour of higher for longer rates. 

Upcoming US data

The US data on tap next include new home sales, S&P Global US manufacturing and services PMI, durable goods orders, and University of Michigan sentiments along with both short- and long-term inflation expectations. Apart from the data, market will take cue from Fed speakers including the Fed Chair Powell. 

Outlook:

Silver prices have recovered sharply from the cycle low around $26 on lower yields and a firmer Dollar amid rate cut bets. Stabilizing Chinese economy has also helped the metal as industrial commodities rallied. US CPI data coming in softer than expected is positive for the white metal.

However, most of the inflation metrics still point to sticky inflation issue. US import price and export price indices (April) were elevated as the readings topped the forecast. At the same time, most of the recent US macroeconomic data have been disappointing, which casts a doubt on industrial demand. Risk appetite has been quite healthy for quite some time.

Hawkish Fedspeak and elevated inflation are likely to cap the upside in the metal; thus, a minor correction is not ruled out. Silver may trade between $28.80 (Rs 85,000) and $30 (Rs 88,300) in the near-term. A convincing break of $30 level is needed for gaining further sustainable upside traction.

In that case, the next near-term resistance is seen at $30.50 (Rs 89,000)/ $31.50 (Rs 92,700). Overall, buying the dips remains a preferred strategy unless $30 resistance is taken out. '  

Disclaimer: Praveen Singh is Associate VP, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas, Views expressed are his own.