PALLADIUM TODAY – Outperforms rest of complex thanks to strong risk-on sentiment

Jan 9, 2017 - 12:24 PM GMT
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Short Term:
Medium Term:
Long Term:
Resistances:
R1 777 2016 high (November)
R2 884 DTL from 2000 high
Support:
100 687
20 696
50 705
200 647
Support:
S1 696 20 DMA
S2 647 200 DMA
S3 626 UTL (purple)
S4 528 June low
S5 449 2016 low
Stochastics:
Legend:

Technical Comment

Momentum is in positive territory and ADX is below 20, indicative of a strong uptrend.

Analysis

  • Palladium has rebounded well after finding some support at its 200 DMA. The metal has firmly broken above its 20 DMA, indicative of brightening sentiment, while it is close to its 2016 high. The recent market action has boosted our confidence to turn positive over the very short term after the break above the 20 DMA.

  • Taking a longer-term perspective, the technical picture remains fairly bullish, our monthly chart shows.

  • On the upside, we see the next key resistance at the 2016 high, a break of which would confirm that the uptrend is set to continue for longer. On the downside, a break below the 20 DMA would suggest sentiment is worsening, reaulting in additional selling pressure toward the 200 DMA and, ultimately, the UTL.

Macro drivers

Palladium is consolidating at the start of the week after a significant rally of nearly 11% last week thanks to a renewed buying interest across the precious metals and strong risk-on sentiment underpinned by healthy macro data (e.g. US jobs report).

The wave of speculative profit-taking seems to have ended, the latest CFTC statistics showed. Non-commercials extended their net long positioning over December 27-January 3 after cutting it in the preceding three weeks. Speculative positioning in Nymex palladium looks neutral so we see plenty of room for additional speculative buying in coming weeks.

There has also been renewed buying interest among ETF investors since the start of the year, with total ETF holdings up 5,308 oz so far, after they liquidated a sizeable 180,000 oz in December 2016. Whether ETF buying will prove sustainable remains to be seen.

On the fundamentals, autocatalyst demand for palladium, which constitutes about 75% about total demand, was robust through 2016, judging by the latest auto sales figures:

  • US sales, up 0.4% year-on-year in 2016 at their highest since 2005 (Autodata).
  • 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).

Growth in auto sales will probably remain solid in 2017, especially in China where the government decided to extend the tax cut on small-engine vehicles – the tax will, however, be at 7.5%, up from 5% in 2016 but still below the earlier 10%.

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 are friendly toward palladium over the very short term (around one month), mainly because the break above the 20 DMA suggests a stronger sentiment. We are therefore inclined to play the upward momentum and expect confirmation that the uptrend is set to last longer, with prices hitting higher highs. But a renewed break below the 20 DMA would force us to reassess.

We remain constructive over the short and medium terms – in the first half of 2017, we expect the macro backdrop to remain friendly for base metals and for palladium thanks to stronger global growth dynamics. In addition, we see growth in autocatalyst demand picking up further, boosted by China. Finally, global refined palladium production should be broadly unchanged.

 

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.
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