Zinc extends bullish run on weaker dollar

Thursday, February 04, 2016

Three month LME zinc prices rallied for the fifth straight session as a sharp sell-off in the dollar against a basket of major currencies as well as improving fundamentals in China buoyed demand for the metal. After hitting a fresh six and a half year low last month zinc prices have rallied almost 20%, making it the best performing base metal so far this year. Prices have added just over 6.5% this month alone as the metal commonly used in galvanized steel trades towards $1,723/tonne at the time of writing. A cheaper USD has spurred some restocking in China ahead of the week long New Year celebrations next week, with the dollar index losing 2.0% at one point yesterday. Activity early this morning has seen the greenback remain under pressure, trading towards 97.060 at the time of writing and we view additional dollar weakness supportive to the base metals complex.  

The Bank of England’s MPC are due to release their base rate decision later today which the majority of market participants expect to remain unchanged at 0.5%. What is surprising is that a growing number of market participants are leaning towards an interest rate cut this month with the forward rate in March around 0.45%, dropping below 0.40% six months out. Traders have likely been spooked by the Bank of Japan, who last month surprised markets by imposing negative interest rates and with markets currently pricing in the worst of everything all at once we view the current outlook for the UK base rate as largely exaggerated.

A further rate cut is possible but given the recent spike in market volatility which we viewed as exaggerated as well as UK economic data which has on the whole been stable it would be hard to justify a further cut in benchmark UK rates unless a significant deterioration in economic outlook was registered. As well as the base rate decision, the central bank is due to release its inflation report which participants expect will  be peppered with subdued views regarding prices and growth and while the report may signal towards prolonged dovishness the pound sterling could come under pressure and reverse some of yesterday’s gains. Having rallied towards 1.4649 from 1.4410 yesterday the pound seems well supported around 1.4570 against the USD at the time of writing.

3-M Zinc prices buoyant on a weaker dollar

LMZSDS03 Comdty LME ZINC 3 2016 02 04 08 16 37

Sterling holds tentatively to yesterday's gains

GBP Curncy British Pound Spot 2016 02 04 07 45 01

Events for today

0830

DE

Jan

Markit Construction PMI

1200

UK

Feb

Bank of England Inflation Report

1200

UK

Feb

Bank of England Bank Rate

1230

US

Jan

Challenger Job Cuts

1330

US

w/e

Initial Jobless Claims

1330

US

Jan

Continuing Claims

1500

US

Jan

Bloomberg Consumer Comfort

1500

US

Dec

Factory Orders

1500

US

Dec

Durable Goods Orders

1500

US

Dec

Durable Ex Transportation

Topics: BoE, DXY, LME, GBP, Zinc
More from: Kash Kamal