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As the latest situation in the Middle East has become one of the most recently discussed topics, our Head of Investment Research Vrasidas Neofytou will analyse the geopolitical developments on RIK1 TV program «Απο Μερα σε Μερα» on Wednesday, September 18th at 12:20 pm.
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It was our pleasure to be a part of three magical evenings in Episkopi Village, Limassol supporting the charity Christmas Village activities which took place from the 20th till 22nd of December, 2019.
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The silver market has experienced some rollercoaster rides this week, driven by a Reddit trading frenzy, similar to the retail-driven buying frenzy in heavily shorted shares such as Gamestop and AMC Entertainment.
Spot silver gained 20% in a three-day rally to 30 dollars per ounce, hitting its highest level since 2013. The rally was driven by the furious buying of a group of retail traders, organized on the WallStreetBets Reddit forum and targeting the short squeeze from the hedge funds.
However, the price retreated towards 27 dollars per ounce on Tuesday, following a margin hike on silver futures by the Chicago Mercantile Exchange, and as trading platforms such as Robinhood placed trading restrictions.
Even though the recent rally was driven by non-fundamental reasons, Wall Street analysts have been very bullish on Silver, with an average target price near 30 dollars per ounce in 2021.
The bullish outlook for Silver is based on the robust demand for industrial metals from China, the weaker US dollar, the inventory deficit, and the growing demand from the green energy sector.
The US stock indices and the US dollar have extended weekly gains driven by the hopes of Biden’s fiscal stimulus, the US labour market recovery, the positive vaccine distribution, and ahead of the US Non-Farm Payrolls report for January.
US Non-Farm Payrolls forecast:
The US Labor Department will release its January’s Non-Farm Payrolls report on Friday afternoon, with market analysts expecting 50,000 payrolls added in January, after a decline of 140,000 in December, while the unemployment rate is expected to stay at 6.7%.
Market Reaction:
All US indices ended Thursday’s session with more than 1% gains on improved risk sentiment, with S&P 500 and Nasdaq indices settling at fresh record highs of 3.871 and 13.777, respectively. The industrial Dow Jones closed at 31.055, just below its all-time high, posting a four-day winning mark.
Gains in major tech and cyclical names pushed S&P 500 and Nasdaq to hit new record highs, as investors bet on faster US economy recovery based on the better-than-expected initial jobless claims in the week ending Jan. 23, which fell to the lowest level since November.
Robust gains in US Dollar and Treasury Yields:
The world’s reserve currency has extended its recent upward movement bouncing off its 2020’s lows boosted by the improved US economic & labour market data, and with hopes for faster vaccine rollout in the country which causes some dollar short squeeze.
As a result, the DXY-US dollar index climbed to a 2-month high of 91.60 on Friday morning, ahead of its best week, sending EUR/USD pair to trade below $1.20 for the first time since Dec.01.
The 10-year Treasury Yield trades near 1.15%., close to its 12-month high., despite the zero interest rates and Federal Reserve’s continued dovish monetary policy, which caps a possible rise in the long-term US yields.
The recent positive economic fundamental data are bullish for the dollar-denominated assets as they indicate the robustness of the US economy relative to other countries after the 2020’s pandemic-led recession.
Weaker Precious Metals over stronger US dollar:
The “safe-havens” Gold and Silver dropped below $1.800/oz and $26.50/oz respectively, extending this week’s declines over the ongoing stock market rally coupled with the stronger US dollar and rising yields. The recent weakness in the inflation-hedged Gold, came despite the prospects of higher inflation and currency devaluation, likely to result from Biden’s $1.9T pandemic-relief stimulus.
The precious metals are priced in US dollars, with their values rise and fall in mirror image with the greenback. The recent bullish movements in the US dollar and Yields, are making Gold and Silver less attractive for other currency holders and increases the opportunity cost of holding the non-interest yielding precious metals.
I have never subscribed to the theory that interest rate differentials are what determine the value of currencies. Yes, differentials do play a role, but in my opinion a lot less than most people think. Case in point the chart below.
Source: Refinitiv, BNP Paribas
While the yield spread between 10-year US treasuries and 10-year Bunds has increased, this has not stopped the dollar falling almost 10% vs the Euro. Obviously if yield was the main driver of currencies, this should not have happened.
When looking at the current valuation of the dollar, many other factors are in play at the moment, that overshadow yield differentials.
The greatest factor is Inflation tolerance: The Fed has repeated many times that it will tolerate higher inflation for a considerable amount of time, even after the pandemic ends. At the same time, it has also said it will continue to purchase assets for at least the same amount of time.
And contrary to what happened in 2018-2019, when the Fed tried to raise interest rates in order to offset the US government’s increased spending, this time around the Fed will do nothing of the sort, instead opting for continued bond purchases and thus preventing yields from rising.
This will probably create a dilemma for holders of US treasuries. And the dilemma is, will the interest earned compensate for the dollar inflation they will incur. The answer is probably not, which might an additional reason for the correction of the dollar.
Finally, because the fed’s balance sheet is poised to rise for the foreseeable future, in a way this dilutes the value of the dollar a bit. However insofar as the rise of the Euro vs the dollar, please also remember that the US has a twin deficit while the Euro zone a current account surplus.
The DXY index which tracks the US dollar against a basket of six major currencies (Euro weights 60% on the index), rises to 2-month highs of 91.25, amid hopes for stronger stimulus-led US economic recovery, the rising 10-year Treasury yields, the greenback’s short squeeze, and the safety demand on Reddit-driven trading frenzy.
The dollar index is bouncing off the 18-month low of 89 posted on January 06, 2021, propelled from the general appetite for riskier currencies and equities together with the zero-interest rates, the dovish Federal Reserve, the massive monetary and fiscal policies, and the falling treasury yields.
Recovering US dollar’s fundamentals:
The dollar resilience has been significant during the last weeks despite the ongoing stock market rally, the improvement in risk sentiment and the dovish monetary policies from the Federal Reserve.
The US dollar and Treasury yields rose last night after Democrats pushed forward with trying to pass proposed President Joe Biden’s $1.9 trillion stimulus plan in Congress without Republican support.
The rise of the dollar-denominated 10-year Treasury yields above 1.10% and the strong demand for US equities from international funds have been some key positive drivers in the recent dollar’s rally.
The bullish momentum was also supported from the news that US COVID new cases and hospitalizations are heading in the right direction and vaccinations have eclipsed the total number of coronavirus cases.
Furthermore, the coming ISM Service PMI data later today and the NFP- Nonfarm Payrolls report in next Friday would be the most important picture of how the US economy and labour has recovered last month from the pandemic.
As a result of the recent greenback’s strength across the board, the EUR/USD pair touched 2-month lows near $1.20 on Tuesday, the AUD/USD and NZD/USD are coming off recent highs of 0.76 and 0.71 respectively, while the greenback rose against the other safe-havens Japanese Yen and Swiss Franc to 105.10 and 0.90, hitting their highest levels since November.
US dollar outperforms Euro:
The US dollar has been outperforming Euro since December as the US economy has doing better than EU’s economy amid the ongoing pandemic-led lockdowns in the region and the greater challenge on its slow vaccine rollout program (only 3% vaccination of EU’s population vs UK’s 10%).
Hence, the Eurozone’s economy contracted by 0.7% quarter-on-quarter in Q4, 2020, and by 5.1% year-on-year in 2020, with analysts expecting further contraction in Q1 2021 given the extended lockdowns to combat the virus, adding more pressure to the Euro currency.
EUR/USD pair, H1 time frame
Turkish Lira overtakes US dollar:
On the other hand, the greenback has lost some ground recently against Turkish Lira, which climbs to $7.15, hitting its highest level since August.
USD/TRY pair, H1 time frame
The rally in Lira was triggered from the increase in interest rates from the Turkish Central Bank to fight the high inflation and the usage of more hawkish monetary and fiscal policies from President Erdogan to support the pandemic-damaged Turkish economy.
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