Near-term strength in the euro relative to the US$ should favour precious metal outperformance, benefitting gold, platinum and silver. However, the US$ is oversold and three potential interest rate rises by the Federal Reserve could boost the US$ relative to the euro in the second half of the year and impact the suite of precious metals.
Despite an expected improvement in demand in 2018, the industrial influence is unlikely to impact platinum’s precious status and sympathy to gold. However, cuts to supply establish a strong price floor at above $860/oz. Palladium was the outperformer in 2017, with prices rising by 59% last year, and market tightness continues into 2018 with lease rates remaining relatively elevated. Prices could be lifted to $1,170/oz but less favourable news, particularly from the auto sector, could induce profit taking.
There is limited downside for the small PGMs with demand drivers continuing to lift prices. Rhodium demand is likely to continue to increase, but stocks built up in China last year could dampen further price appreciation. Ruthenium prices are rising from a low base and carry momentum from multiple end-uses, while iridium is likely to benefit from further plant capacity increases.
Near-term euro strength to give way as dollar gains later in the year
The euro began 2017 by slipping to a low of 1.04 $/€ in early January, its lowest level since 2002. From that point, however, it staged a strong rally, strengthening by almost 15% to 1.20 $/€, first reaching that level in September and, after a pull-back in the fourth quarter, hitting it again at the end of the year.
The year 2017 was one of monetary policy normalisation and even though the Federal Reserve did more to normalise policy than the ECB, the euro strengthened against the dollar. As the year progressed economic growth in the Eurozone improved, beating forecasts, sentiment about the outlook became more positive and so the euro was favoured over the dollar. In addition, much of the positive news was already priced into the US$ at the start of the year, including expectations of fiscal stimulus and tax cuts following the election of President Trump, and the Tax Reform bill took longer to arrive than initially assumed.
In the US, the mid-term elections for Congress later this year could make passing further legislation difficult, so the Trump administration might focus more on renegotiating trade deals and the trade balance with China. In Europe, political uncertainty has not disappeared. Negotiations to form a coalition between the Christian Democrats and Social Democrats are difficult and forming a new German government will thus remain challenging. Italy has a general election scheduled for March and opinion polls suggest that the Five Star Movement now has the most support, ahead of the ruling Democratic Party. Meanwhile, Brexit negotiations are ongoing and a smooth transition to a new trading arrangement between the UK and the EU is far from assured.
Monetary policy plans have been clearly laid out by the Federal Reserve and the ECB, and economic growth forecasts have been raised and presumably these have been priced in. The Eurozone outperformed expectations in 2017 to the benefit of the euro but this will be much harder to achieve in 2018.
This year the Federal Reserve is expected to raise rates a further three times and it will also be stepping up the amount by which it is reducing the size of its balance sheet each quarter, while the ECB is slowing its asset purchases to €30 billion per month until September at least, but has no plans to change interest rates. If the Federal Reserve continues to tighten monetary conditions faster than the ECB in 2018, this would favour the US$ over the euro. Economic growth is also expected to accelerate in the US compared to 2017, while it is projected to slow slightly in Europe, a reversal of the trend in 2017.
In the short term, momentum is with the euro and further euro strength and dollar weakness are likely. However, in the futures market the non-commercial traders have built up a record long position in the euro against the dollar. This suggests the trend is near to ending since there cannot be many more euro buyers left. The exchange rate was driven more by the performance of economic growth in the Eurozone beating expectations than by the relative balance sheets of the respective central banks in 2017. Should growth in the US increase this year the focus could shift back to the Federal Reserve’s tightening of monetary policy and it will need only a small shift in traders’ outlooks to start to favour the dollar. Near term, the euro could advance to 1.27 $/€, but the US$ is expected to strengthen later in the year and the exchange rate could fall back to 1.15 $/€.