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Market to become choppy as ‘fiscal cliff’ approaches

December 17, 2012

The countdown has begun, fiscal cliff is only 2-weeks away, as the deadlock between the two-leaders to agree on tax and spending continues to be the bone of contention and if the deadline date expires we could be heading for QE5. Estimate suggest that that overall 2 million unemployed people will be deprived of benefits and by the end of quarter another million state unemployed workers will be the sufferer.
Since the job market has started to respond to the FED’s 3-times quantitative easing measures, last week it decided to introduce QE4. I think FED would not like to spoil the party and may have to act quickly. Therefore, as we get closer to the expiry date, market will become choppy due to fear of liquidity squeeze, which is bad for risky asset. If the date expires stock market will suffer, currencies will get weak and this is one factor hurting gold too, but US Dollar will be sole beneficiary.
However, since pressure is mounting to reach a compromise, Obama after offering the package is comfortably placed, as the ball is in Republican’s court. I will not be surprised if Republicans comes up with a positive response and some sort of agreement is reached before Christmas.
Two other major positive developments have taken place in Europe, as Greece will get the money after EU Finance Ministers decision to agree on common banking supervisor. Under this agreement, EU banking supervisor will be allowed to monitor, audit and intervene if required that should improve the level of confidence in regions brittle banking system. The positive side of the banking union is that it will be in a position to rescue Euro-zone’s weaker banks when in trouble.
Despite weak Euro-zone economic data European currency succeeded to retain strong tone, which was only possible because of EU agreeing to fund Greece. Agreement on EU Banking supervisor further paved way to ease the sentiment and FED’s QE4 announcement gave more confidence to the Euro Bulls. But this does not guarantee stability in the Euro region, which remain suspect to many surprisingly negative events that can pop any moment. So watch your step before you take a leap beyond 1.3240 levels.
Japanese election is the major event of the week, as LDP Chief Shinzo Abe has already called for unlimited asset purchase program to stimulate Japan’s economy that will assist to sharply increase fiscal spending through hyper-easy monetary policy that will further weaken Yen. But there is possibility of sharp correction as well, since Yen after Abe’s easing call has made one sided journey and is oversold.
GOLD @ $ 1696.60 = since last two-weeks gold has been struggling to make gains and selling interest has often been witnessed on the rise. Fed easing policy for the 4-time did not support the Yellow metal. But in my view, fiscal cliff is the biggest hindrance because passage of date risk for liquidity constrains, which means liquidation of asset that may not be good news for gold. Similarly agreement would see surge in gold price.
This week, for upside gains gold needs to break $ 1706-08 levels to challenge $ 1725 for test of $ 1735-38 zones. I will not be surprised if we see fall below $ 1688 to challenge $ 1675-80 zones.
EURO @ 1.3160 = Euro has good support around 1.3050-70 zones and is like to make an effort to push beyond 1.3298 levels to test 1.3240-60 zones. I will continue my strategy to pick the top and sell the European currency, as unlikely to see move beyond 1.3325 this week. On the downside break of support level will encourage for 1.2950. Ranges for the week 1.3020 -1.3310
GBP @ 1.6172 = initially we could see mild Bullish tone, as 1.6050-70 should provide good support to Cable that may bounce back from 1.6110 and break of 1.6225 will pave way for 1.6280 before this rally fizzles out. Earlier break below 1.5950-70 levels will slow down the strong Bullish tone of GBP. Ranges for the week 1.6020 – 1.6320
JPY @ 83.50 = Unexpected volatility is a possibility and only break of 83.90 will see a move towards 84.50-80 zones. However, I will not be surprised to see a teats and break of 82.40 for more losses. Ranges for the week 81.80 – 84.95
AUD @ 1.0564 = The Australian currency is required to push beyond 1.0590 for 1.6025 and break hear would encourage for 1.0680. Risk for bigger drop will only be possible on break of support level of 1.0420-40 zones. Prior test the support level AUD needs to push below 1.0490-95. Ranges for the week 1.0420 – 1.0680

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