Volatility to persist in commodities in run up to central bank meetings

Commodity

Ravindra Rao, VP-Head Commodity Research at Kotak Securities

Hawkish rhetoric by several Fed officials followed by renewed fears of a lingering recession in the US later in the week weighed on global risk sentiments.

The dollar swung between gains and losses this week but largely hovered near 102 levels and is headed for a first weekly gain following five consecutive declines as comments in favour of continued rate hikes increased odds of a 25 bps rate hike in the May meeting to 85 percent. However, gains were capped as a string of weak economic data from the US renewed concerns that the world’s biggest economy is heading into a recession.

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Prospects of further rate hikes in the US coupled with global inflation concerns, pushed US treasury yields higher, in turn weighing on non-yielding bullion. COMEX Gold plunged to $1,980.9 per troy ounce and is poised for a second consecutive weekly loss, amid the rising greenback. Silver witnessed a downside in line with weaker gold and a mixed trend in industrial metals. Both SPDR Gold and iShares Silver holdings saw outflows this week.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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With the FOMC meeting in focus and rising prospects of higher rates for longer, we don't deny the odds of some pullback in gold prices during the near term. However, a higher rate means more pain for the economy going forward, bolstering our medium to long-term bullish outlook.

On the price action front COMEX Gold is expected to take support near $1,974 per troy ounce. If the said support is penetrated, only then the fall might deepen towards $1,946 per troy ounce, the next best support. COMEX Silver is also holding on to the support near $24.60 per troy ounce even after a bearish engulf candlestick formation on the daily chart. Having said that, if the bears break the support of $24.60 per troy ounce on daily closing the fall might extend to $24 per troy ounce, the next best support.

Crude oil closed 6 percent lower, its first weekly decline since the banking crisis in mid-March, and base metals mostly extended losses as US recession fears weighed on demand outlook despite encouraging Chinese GDP figures. Apart from disappointing US data releases, Federal Reserve Beige Book survey too stated the US economy stalled in recent weeks, with hiring and inflation slowing and access to credit narrowing.

As of now, economically sensitive commodities are struggling for direction as participants assess the latest inflation data and await more data before the major central bank meetings in the first two weeks of May. On the fundamental front oil prices may remain soft on easing supply concerns as Iraq is likely to restart the export of crude oil from the Kurdistan region by the end of this week.

US Q1 GDP, Bank of Japan monetary policy and the Fed’s preferred PCE price index might be in the spotlight for the coming week, while PMI figures released this week will set the tone for early next week. The Bank of Japan is unlikely to change its monetary policy trajectory.

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