Silver prices are looking into the abyss beneath weekly support
- Silver is on his back foot looking into the abyss.
- The US dollar smile theory is a prevalent topic as Covid risks increase.
At the time of writing, silver is down another 1.09% for the day, albeit after rebounding from previous daily lows.
XAG / USD hovered between a high of $ 25.27 and a low of $ 24.81 on Tuesday despite the better tone of risk, again under pressure from a resilient US dollar.
The US dollar climbed to a three-month high on a safe flight on Tuesday as investors remained concerned about a rapidly spreading variant of coronavirus that could slow global growth.
The US stock market has recovered, however, and has had a streak of losses lasting several days. The benchmarks were supported by a series of positive gains and some resurgence in economic optimism.
Investors have begun to rationalize that fears of another crippling round of global lockdowns may be exaggerated.
All three major US stock indices were up more than 1%, with the blue-chip Dow leading the way after its worst day in nine months. The previous session put the S&P on track for its first rise in four days and the first rise in the Nasdaq in six days.
That backdrop is bullish for silver as it likely reflects a passing flaw in investor optimism that could amount to a full blown risk rally that is expected to slow the US dollar’s rise.
S&P 500 / DXY daily divergence
S&P 500 / XAG / USD daily correlation
However, there are now arguments for a longer-term bullish US dollar based on the dollar smile theory and the prospect of the worst of the Delta variant, the world’s dominant coronavirus strain today.
In the United States, for example, there has been an increase in infections, especially in areas where vaccinations have lagged.
The immediate concern of the markets, however, is whether we will see a slowdown in the global economic recovery.
7/21 Asian early update:
This could be the predominant force leading to strong demand for the greenback, especially as all recent data suggests a restrictive issue at the Fed.
” Since the last FOMC meeting, the labor market, retail sales and inflation have grown very strongly. While the rise in COVID cases is a legitimate concern, there is a risk that the market will become too cautious about its expectations of how the Fed will communicate next week, ”analysts at ANZ Bank said.
This concludes the thesis that the US dollar smile theory is real and will be a headwind for precious metals for the foreseeable future.
Brown Brothers Harriman analysts described the theory as “strong US data fueling the dollar’s appreciation as the Fed continues to take cautious steps toward tightening… On the other hand, increasing risk aversion stimulus has been helping the dollar lately. This supports the view that the greenback is likely to benefit in both situations. Hence the smile when the dollar appears on both ends of the risk spectrum. ”
The dollar’s gains come at a time when the yield differentials have moved against it. Benchmark 10-year US Treasury bond yields fell below 1.20% on Monday to a five-month low.
The recovery yield could eventually push the greenback higher, especially as investors turn away from emerging markets and instead invest in US dollar denominated holdings.
Meanwhile, the precious metals barometer for risk-off flows, gold, was unable to recover despite the ongoing risk-off.
Also pessimistic on silver, as it tends to track its sister metal’s price movements over time, analysts at TD Securities argue that this “ underscores that speculative flows remain particularly weak and increase the potential for a deeper pullback ” at Gold price.
Gold / Silver weekly correlation
In the past few weeks, the gold to silver ratio has skyrocketed as the divergence in the graph above subsides over time.
The bullish trend in silver may well have peaked and be poised for a significant downturn in the coming weeks.