Search ForexCrunch
  • Silver continues to drop and is now under $25.50 and eyeing a test of $25.00.
  • USD strength is the main culprit behind Tuesday’s decline, with the currency garnering some safe-haven demand.

Spot silver (XAG/USD) prices have continued to head lower on Tuesday. As a recap, Monday’s sell-off seemed for the most part technically driven, with XAG/USD breaking below an uptrend linking the 5, 8, 12, 18 and 19 March highs to drop under the $26.00 level. After a period of consolidation above $25.50, the selling pressure has resumed this Tuesday, with spot prices dropping below the $25.50 mark and looking eager to test monthly lows around the psychological $25.00 area. As things stand on Tuesday, spot silver is nearly 2.0% or over 50 cents lower on the session. That means on the week the precious metal has dropped nearly 4%.

Driving the day

While Monday’s sell-off seemed technically driven as opposed to any movements in correlated asset classes, Tuesday’s drop is being driven by an ongoing pick up in the US dollar. Just this session, the Dollar Index (DXY) has rallied from session lows around the 91.80 mark to fresh two-week highs in the 92.20s, with most of the strength coming since the arrival of European participants to the market.

Concerns regarding tensions between western countries and China (as a reminder, last week’s talks between US and Chinese officials in Alaska were seemingly fairly tense and the US, UK, EU and Canada have recently hit China with human-rights related sanctions, with China responding in kind) and concerns regarding the state of the pandemic in Europe (Germany is extending its lockdown in lockstep with the likes of France and Italy toughening restrictions as the bloc fends off a third virus wave and the vaccine export row, particularly with AstraZeneca and the UK, continues amid the EU’s sluggish vaccine rollout) are being cited as reasons as to why markets are in a somewhat defensive mindset on Tuesday; global equities are mixed but with a negative bias, crude oil is being slammed and risk-sensitive currencies are fairing poorly. This is all being slated as benefitting the US dollar.

Note that the dollar is stronger despite a drop in US bond yields (the US 10-year is back below the 1.65% mark, down more than 10bps from recent highs). The reason for the drop in US government bond yields is not abundantly clear; 1) having been relentlessly hammered in recent weeks, investors might be being tempted back into investing in US bonds with yields now at more attractive levels and 2) with markets in a somewhat defensive mood (global equities, risk-sensitive commodities and currencies are mostly lower), there could be an element of safe-haven demand for US debt. USD price action suggests currency traders don’t expect the recent drop in yields to have much further legs.

More specifically for precious metals; the March Philly Fed non-manufacturing survey was very strong and comes on the back of a string of very good regional Fed surveys taken so far this month – all point towards a strong preliminary March Markit PMI report on Wednesday. Meanwhile, Fed member Robert Kaplan was sounding quite hawkish calling for rate hikes in 2022 (though he won’t be a voter that year). A strong data, hawkish Fed combo is not good for silver, whose price tends to appreciate (as is the case with gold) when the economy is weaker and, as a result, central bank policy is looser, given the higher degree of money supply expansion.

Looking ahead for the rest of the session, Fed Chair Jerome Powell is currently speaking in his first of two days of testimony before Congress. His pre-released remarks contained no new information on the Fed’s view of the economy or policy guidance compared to what was in last week’s monetary policy statement and he has so far not deviated from the usual Fed script. Other Fed members will also be speaking including Raphael Bostic, Thomas Barkin, Lael Brainard and John Williams, all of whose remarks will also be worth watching to see if they deviate from the usual Fed script as was the case just now with Kaplan. Any unexpected hawkish vibes could be silver negative.