Analysis
- Palladium has consolidated since hitting a 2016 high late in November, breaking below its 20 DMA, which could suggest a weakening in sentiment. Unless palladium manages to move quickly back above its 20 DMA, we feel the bout of profit-taking may continue further toward its 200 DMA.
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On the upside, palladium needs to move back above its 20 DMA to make sure sentiment remains bright. If so, its first challenge is to move above $800 and then the DTL from the 2000 high on our monthly chart. On the downside, we will pay close attention to the 20 DMA, a firm break of which could presage a drop toward the 100 DMA and then the 200 DMA.
Macro drivers
Palladium has edged lower on Thursday 15 December due to intense selling pressure across the precious metals after the Fed surprised on the hawkish side at its meeting yesterday.
Although the Fed delivered a 25-basis-point increase in the Fed funds rate (FFR) – in line with expectations – its accompanying projections and statement sounded more hawkish than the market had expected. In fact, the Fed guided the market toward a steeper path of the FFR – it sees three rate increases in 2017, compared with two projected at its September meeting. It left its projections for 2018 and 2019 unchanged, however.
Against this, the dollar has rallied strongly, US real rates have climbed and risk assets have come under selling pressure. This has pushed palladium prices lower although the metal continues to outperform. We attribute its relative resilience to its high correlation with base metals, which also have shrugged off Fed hawkishness.
The recent selling pressure seems to have come from ETF investors rather than speculators. ETF investors were net sellers of 138,000 oz last week, corresponding to a decline of 7.4% in total ETF holdings. ETF investors are net sellers at 160,000 oz so far in December after selling 142,000 oz in November.
Speculative sentiment is strong. Speculators lifted their net long position for a fifth consecutive week over November 29-December 6. The net long fund position is now up 100% in the year to date.
ETF investors prefer to continue to reduce their long exposure to palladium and take advantage of higher prices to close out their positions. ETF holdings – at 1.736 million oz as of December 14 – are down 160,000 oz or 8% so far this month after a drop of 143,000 oz or 7% in November.
On the fundamentals, autocatalyst demand for palladium, which constitutes about 75% about total demand, remains healthy, judging by the latest auto sales figures:
- Chinese sales in January-November 2016: up 15.6% year-on-year (CAAM).
- EU sales in January-November 2016: up 7.1% year-on-year (ACEA).
- US sales in January-November 2016: up 0.1% year-on-year (Autodata) after a record sales year in 2015
Whether solid growth in auto sales will continue in 2017 remains to be seen – downside risks include, most notably, the expiration of the China’s tax cut on small-engine cars.
Supply/demand balance:
Johnson Matthey revised its forecast lower in November. It now sees the global palladium market in a deficit of 651,000 oz in 2016 compared with the 843,000-oz deficit it projected in May.
Conclusion
We have turned neutral on palladium over the very near term (around one month) after the break below the 20 DMA. A break below $700 would turn us bearish because this would signal that the bout of profit-taking may be significant.
We remain constructive over the short and medium terms – the macro backdrop should remain friendly for base metals and palladium despite the recent US rate increase, autocatalyst demand should continue to grow at a healthy rate thanks to improving global economic conditions and global refined palladium production should be broadly unchanged.
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