Outsized 50-bps Fed rate cut positive for Silver; check trading strategy

Silver: Sharply up in volatile trading as the Fed cuts rate by 50-bps.

Spot silver was extremely volatile in the wake of the US Fed cutting rates by 50-bps at its FOMC meeting concluded on September 18. 

The white metal surged to a fresh cycle high of $31.20 soon after the rate cut announcement; however, it turned sharply lower during the Fed Chair Powell’s presser in which he struck a balanced tone. He said that this outsized cut was to ensure that the Fed doesn’t remain behind the curve. 

He ruled out a US recession in near term as the job market remains strong amid falling inflation which the Fed believes will fall to the Fed’s target of 2 per cent. In addition, he said that such big sized rate cuts will not be usual as going forward the Fed will decide its monetary policy data by data. As per the latest projections by the Fed, the Central Bank is expected to cut rates by another 50-bps collectively in the remaining two FOMC meetings this year.

 

US yields and the US Dollar Index surged on no recession talks, which sent silver nearly 5 per cent lower to $29.70 as it extended its decline in today’s Asian session. However, the metal recovered almost all its losses in the European and the US sessions as traders come to terms with the 50-bps cut and the US Dollar Index fell amid stabilizing US yields and healthy risk appetite.

Spot silver rose to a fresh cycle high of $31.29 in the US session. It was trading with a hefty gain of 3.48 per cent on the day at $31.12 when the MCX closed. MCX December Silver contract at Rs 90,005 (LTP) was up by 1.3 per cent.

The metal got support from a positive undertone in the industrial commodities, too.

US Dollar Index and yields

The ten-year yields at 3.745 per cent were up around 0.81 per cent on the day as the yields rose for the third straight day. The two-year yields were slightly lower.

The US Dollar Index fell to 100.22, the YTD low on the Fed’s rate cut decision; however, it recovered its losses to sharply rise to 101.47 as the US yields surged, though it eased nearly 0.70 per cent to 100.68 as risk appetite remained healthy. It is down nearly 0.30 per cent on the day.

Data and event watch

Today, as expected, the Bank of England kept its benchmark interest rate unchanged at 5 per cent as the Central Bank adopts a gradual approach to rate cuts.   

The US current account balance (Q2) came in at -266.80 billion Vs the forecast of -$260 billion. Philadelphia Fed Business Outlook (September) at 1.7 was better-than-expected data of 0. Weekly job data were encouraging as initial jobless claims came in at 219K (forecast 230K), whereas continuing claims were reported to be 1829K (forecast 1850k). Existing home sales (August) at 3.86 million lagged the estimate of 3.90 million though.

Upcoming data and event

Today’s major data on tap include Japan’s national CPI, UK’s retail sales, Euro-zone’s consumer confidence and Germany’s PPI.

Bank of Japan and People’s Bank of China will deliver their monetary policies today. No change is expected in their monetary policies but Bank of Japan’s statements and forward guidance may influence the markets. 

ETF and COMEX inventory

Total known global silver ETF holdings stood at 712.542MOz as on September 18, the lowest since July. COMEX Silver inventory was noted at 305.96 MOz as the inventory level continues to hover around the highest level since October 2022.

China’s silver price at a premium

China’s silver prices are nearly 10 per cent higher than the international prices on strong demand from solar panel sector and healthy imports this year.

Geopolitical Watch

After two straight days of device explosions across Lebanon and the region, Israel launched airstrikes on Hezbollah targets in Southern Lebanon; however, Israeli ground forces have not crossed border yet. As per Lebanon’s health ministry, 37 people were killed and thousands more were injured. Fear of an all-out war between Israel and Hezbollah have gripped the world leaders and markets. 

Outlook
 

Markets had placed nearly 63 per cent probability on the Fed cutting rates by 50-bps; thus, this outsized rate cut is positive for the metal. Although the Fed sees only two more rate cuts of 50-bps collectively this year, markets expect a faster pace as the US job market is losing steam and inflation is controlled. In addition, strong demand from China and India is lending good support to the metal. Solar panel demand uptick is quite positive. Positive undertone in the industrial commodities and the Fed ruling out recession at least in the near term will also support it. Heightened geopolitical tension will lend support, too. 

Silver is expected to rise further to challenge its key resistance at $32.52 (May high. A rally to $35 by the end of the year is quite possible. Support is at $30 (Rs 86,800)/$29.70 (Rs 86,000)/$29.10 (Rs 84,000). Resistance is at $31.75 (rs 91,800) /$32.52 (Rs 94,000).

Buying the dips remains the preferred strategy.

Risk to bullish view may come from the key event of the Fed Chair Powell’s speech next week. In addition, US GDP and PCE inflation data due next week could also lead to volatility.     

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