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  • Spot silver has spent most of Monday consolidating either side of its 200-day moving average, which sits just above $24.80.
  • Silver has been pressured by higher yields but is being supported by the weaker USD.

Spot silver (XAG/USD) has spent most of Monday’s session consolidating either side of its 200-day moving average, which currently sits just above $24.80. That means the precious metals has dropped about 20 cents or 0.8% from last Thursday’s closing levels of just shy of the $25.00 level. Trading conditions have been somewhat subdued, which is not too surprising given the absence of European market participants with most away for the Easter Monday public holiday and also a large number of US participants also away (though US markets are open).

Driving the day

Silver seems to be taking its cue more from bond yields than from FX markets. On the former, a string of strong tier one March data releases in the form of last Thursday’s ISM manufacturing PMI survey, last Friday’s labour market report and Monday’s ISM manufacturing PMI survey have resulted in a jump higher in US government bond yields at the start of the week, with US 10-year yields now comfortably back above the 1.70% mark following last Thursday’s close under 1.68% and real yields also a little higher, with the 10-year TIPS yield up about 3bps.

As a reminder, higher bond yields are typically a negative for non-yielding precious metals, given they make investing in fixed income comparatively more attractive. If yields continue to rise as the near-term US economic outlook continues to brighten (and materialise in line with or above expectations), then this is not going to be good for precious metals.

The losses on Monday likely would have been much worse were it not for the falling US dollar. In terms of why the US dollar is weakening so much, market commentators are suggesting a combination of profit-taking in wake of March’s (and Q1’s) strong performance and a lack of safe-haven demand amid surging US equities (the S&P 500 is up roughly 1.5% on the session and at record highs near 4080).

However, over the past few weeks, higher bond yields and optimism about the US economy (with both being seen at the start of the week) have typically been USD positive. Perhaps then, the downturn in the US dollar will be short-lived. If so, and the USD resumes its recent upward trajectory in line with rising US government bond yields, this will be a double whammy of negative for precious metals (which typically have a negative correlation to USD as well as bond yields).

Looking ahead, the Fed will be back in the spotlight this week as the main driver for the dollar, with focus on Fed speakers including Chairman Jerome Powell (who speaks on Thursday) and focus on the releases of the minutes of the March FOMC meeting on Wednesday. Fed speak and the minutes are likely to be dovish in terms of policy guidance (i.e. highly accommodative policy to be in place for a long time with the US economy still a long way from the Fed’s goals), but the tone on the economic recovery (especially in wake of the strong March data over the last few days) and on higher yields (Fed members are expected to continue to indicate that they are not concerned by yields at these levels) are both expected to be a little more hawkish and may facilitate higher yields this week.