PALLADIUM TODAY: Sell-off reinforced by hawkish Fed

Short Term: Medium Term: Long Term: Resistances: R1 797 2017 high (Jan) R2 884 DTL from 2000 high Support: 200 676 50 739 20 768 100 713 Support: S1 768 20 DMA S2 739 50 DMA S3 676 200 DMA S4 645 UTL (purple) S5 528 Jun low S6 449 2016 low Stochastics: Legend: DMA – daily moving average Fibo – Fibonacci retracement level The momentum index allows us to determine whether momentum is positive (>0) or negative (<0). We use a parameter equal to 10, corresponding to momentum over the past 10 days. ADX – average directional index; this allows us to gauge the strength of the current trend (above 20, the trend is strong; below 20, the trend is weak) The combination of momentum and ADX allows us to determine the current trend (up or down) and its strength (strong or weak). RSI – relative strength index; used to detect whether a metal is oversold (RSI below 30) or overbought (RSI above 70)   Technical Comment Momentum is negative and ADX is below 20, reflecting a weak downtrend. Analysis Palladium is breaking below its 20 DMA, perhaps a sign of weakening sentiment. But we remain constructive over the very short term (around one month) for now because palladium set a higher high this year, which is a strong bullish signal that underpins the uptrend.  Taking a longer-term perspective, our monthly chart shows the technical picture remains fairly bullish, with an upward-sloping key MMA. On the upside, we see the next key resistance level at the current 2017 high. On the downside, a sustained break below the 20 DMA would suggest sentiment is worsening, resulting in additional selling pressure towards the 50 DMA, the 100 DMA, the 200 DMA and, ultimately, the UTL. Macro drivers Palladium is under strong selling pressure alongside platinum so far this week, which could reflect the pick-up in risk aversion accompanied by dollar strength following last night’s Fed minutes. At the the January/February FOMC meeting, “many” FOMC members judged that a rate increase would be appropriate fairly soon, especially if growth and inflation continue to improve. This hawkish tone was in line with the latest testimony from Fed chair Janet Yellen earlier this month in which she emphasised that waiting too long to raise rates would be “unwise”. ETF investors have remained quiet so far this week after boosting significantly their buying last week. According to our estimates, palladium ETF holdings jumped by roughly 19,000 oz or 1.3% over February 10-17. This could suggest a positive change in sentiment after ETF investors liquidated a significant 167,000 oz of their ETF holdings in January. Meanwhile, speculators lifted their net long position slightly over February 7-14, the latest COT statistics show. The net long fund position is now up 18% in the year-to-date after it jumped last year so we now see the current spec positioning toward palladium as overstretched on the long side. A return of risk aversion may prompt some profit-taking considering the high correlation between palladium and more traditional risk assets such as equities. There is a key downside risk to palladium prices this year, namely weakening autocatalyst demand from slowing Chinese auto sales after the government decided to raise the sale tax. According to the China Passenger Car Assn, China passenger car sales dropped 9.8% in January from a year ago after hey rose strongly in 2016. Supply/demand balance: Johnson Matthey revised its forecast for the global palladium market lower in November 2016. It now sees it in a deficit of 651,000 oz in 2016 compared with the 843,000-oz deficit it projected in May. Conclusion Despite the recent sell-off in prices, we remain friendly toward palladium over the very short term because we see the recent higher yearly high as signaling that the uptrend will continue. But given the volatile nature of the palladium market, we cannot rule out an intensification of the sell-off in coming days. A firm break below $700 per oz would force us to reconsider our stance. We remain constructive over the short and medium terms (i.e. for the first half of 2017) because palladium should get support from a broad-based rally across the precious metals, which we expect during the rest of the first quarter from stronger demand for safe-haven assets. Still, we think that palladium may underperform given its relatively higher correlation with risky assets than with gold or platinum.  For more details, please see our January spotlight. All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

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