Between Chinese Slowdown And Falling Dollar, SLV Remains Up
Summary The Fed remains on the fence about whether it plans to raise rates next month. China’s economic concerns work as a double-edged sword for the silver market. The recent fall of the U.S. dollar has also helped pull up SLV. Will this rally last? In the past couple of weeks, iShares Silver Trust (NYSEARCA: SLV ) has slightly rallied. And even though concerns over China may bring down the price of SLV , on account of potential lower growth in demand for silver, the Fed is still likely to lead the way in moving SLV. The recent weakness of the U.S. dollar and the low chances of a rate hike in September are keeping up SLV. Will this recent rally last long? The Fed remains on the fence I think that if the FOMC was trying all along to keep us guessing on whether it plans to raise rates in September, then mission accomplished. The minutes of the July meeting only added more uncertainty with respect to the rate hike, which is still on the table for the September meeting. The minutes showed that members are mostly positive about the outlook of the labor market: “The pace of job gains had been solid and the unemployment rate had declined, with a range of labor market indicators suggesting that underutilization of labor resources had continued to diminish.” But it was noted that there are also remaining concerns over what the progress of wages: “In addition, it was noted that considerable uncertainty remained about when wages might begin to accelerate and whether that development might translate into increased price inflation.” For the silver market, a weaker Chinese economy — the recent news was that manufacturing PMI fell to its lowest level since 2009 — may also translate to lower demand for silver. But the recent changes due to these concerns, e.g. devaluation of its currency, may have also pulled down the U.S. dollar. Moreover, the latest news from China along with the moves towards devaluing the Yuan have kept the market guessing about the Fed’s rate hike. Currently, the implied probabilities of a September rate hike are at only 28% — still much higher than where they were after the release of the July FOMC meeting statement. The odds of a rate hike in October and December reached 34% and 60%, respectively. Not much higher than where they were earlier this month. This week, the second estimate for the second quarter GDP will come out. A stronger-than-expected growth rate – the current estimates are for 3.2% — could strengthen the U.S. dollar and slightly raise the odds a rate hike. Thus, a positive report could bring back down the price of SLV. But the big report will be released next week: the non-farm payrolls for August. Another strong report, especially when it comes to wages, could raise again the odds of a Fed considering raising rates sooner rather than later. I still think, it won’t behoove the U.S. economy at this point to have even such a modest rate raise, considering the latest developments in China, the lack of growth in wages, the low core inflation – which is still well below the FOMC target, the downward pressure of oil prices on inflation and the jobs growth in the energy industry. In total the FOMC may be better off to delay liftoff until 2016. But for now, the market remains confused. In such times, SLV slightly benefits, even for a short time, as it has rallied in the past couple of months. Moreover, the recent fall in the U.S. dollar has also provided back-wind for SLV. As you can see below, the price of SLV is still strongly correlated with the major currencies pairs, mainly the Euro/USD. (click to enlarge) Source: Bloomberg and Google finance On a broader scale, i.e. over a course of a year and not just over the past few weeks, the U.S. dollar has strengthened against other currencies, as presented in the chart below. (click to enlarge) Source: FRED and Google finance The rally of the U.S. dollar in the past year may have also contributed to the weakness of SLV. Only in the past few weeks, SLV bounced back as the U.S. dollar changed direction. Albeit the general direction in the past year for both of these items was reverse. Despite the weakness in the silver market, at first glance, the demand for the SLV ETF has only slightly diminished in the past several months. (click to enlarge) Source: SLV and Google finance This could suggest that even though the price of silver is going down, investors aren’t backing out of this precious metal. The recent devaluation of the U.S. dollar in part due to the weakness in China and possible delay in first rate hike in years has also provided a bit of relief in the silver market. I don’t think this rally will last long and could change course especially if the upcoming economic reports mainly GDP, to come out this week, and non-farm payroll, to be released next week, show stronger-than-expected numbers. But in any case, if the FOMC were to delay the historic liftoff to a later date (perhaps December), this could also provide another short-term boost to SLV. (For more please see: ” Will Higher Physical Demand for Silver Drive Up SLV? “) Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.