Will The Fed Lift The iShares Silver Trust ETF?

| About: iShares Silver (SLV)

Summary

The FOMC meeting will take place this week. How will it impact SLV?

The ongoing weaker U.S. dollar has provided a boost to SLV.

Low interest rates have also helped drive up SLV.

The risk-off market sentiment continues to drive up the price of iShares Silver Trust ETF (NYSEARCA:SLV). The ongoing weakening of the U.S. dollar and lower interest rates also helps bring up the price of SLV. And this week's upcoming FOMC meeting could provide another boost to the price of SLV if the Fed presents another dovish statement. But will the Fed come out with a dovish statement? And how is the price of SLV expected to react to this news?

The market currently places very low probability of a rate hike in June - and rightly so - but for July the odds are a bit higher at 27%; these chances, however, could also be perceived as relatively low considering the relatively hawkish FOMC minutes and the recent statement by Chair Yellen, in which she pointed out that a rate hike could be appropriate in the coming months.

For SLV, the three main interconnected driving forces include: The direction of U.S. dollar, interest rates and shifts in bearish market sentiment in the markets.

When it comes to the U.S. dollar, as the market places a low chance of a rate hike, the U.S. dollar has also devalued against the major currencies, as indicated in the following chart.

Click to enlarge

Source: FRED and Google finance

This recent shift in the direction of the U.S. dollar seems to have also contributed to the latest recovery of the price of SLV. But this wasn't the only major change in the markets - interest rates have started to come down again.

Click to enlarge

Source of data: U.S. Department of the Treasury

The risk-off sentiment seems to have contributed to the recent fall in long term interest rates: Between the fears of a possible Brexit and the market estimates for a slower growth as there are mounting concerns over the progress of the global economy; these developments only help drive down interest rates. And since interest rates tend to be negatively correlated to the price of SLV, this latest trend also helps drive back up SLV. The other factor that should impact long term interest rates and by extension SLV is the direction of short term rates.

The Fed and SLV

The main event of the week is the upcoming FOMC meeting. In the past, when the Fed released a dovish statement, the price of SLV the following day tended to rally, as you can see in the following chart.

Source: Fed, Google finance and Author's calculations

The chart also shows that when the Fed releases a hawkish statement - such as in the October meeting back in 2015 when the Fed hinted of a rate hike in December - the price of SLV tended to decline the following day. This chart suggests that if the Fed were to release a dovish statement the market could react favorably and bring further up the price of SLV. But will it? Besides the statement, which is likely to keep pointing towards the Fed's dependency in the data, the two other issues to consider are Chair Yellen's press conference and the dot plot. Even though Yellen is likely to reiterate that the Fed could move towards raising rates in the coming months, she could still hint if the Fed is considering raising rates as soon as July. If not, this could be perceived dovish. Also, the dot plot, which isn't expected to be changed and as of the March meeting shows FOMC members estimate 2 hikes this year, could still surprise investors if the FOMC reduces the estimate of a rate hike to a single raise in 2016.

What's next?

The prevailing market sentiment seems to provide a boost to shares of SLV; and shares of SLV may get another positive push this week from the FOMC if the meeting results in another dovish statement. Over the short term, as long as the U.S. dollar and interest rates continue to fall, the price of SLV is likely to benefit from these developments. For more please see: Is SLV about to change course?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.