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Market likely to become choppy – Fx & Gold Dec 24-28

December 24, 2012

As we approach holiday season the deadline for USD 600 billion relief package on tax and spending will expire after seven days, as the two US leaders were reluctant to come to terms and failed to reach an understanding on the looming ‘fiscal cliff’ that has kept global financial market nervous and unsettled.
This was one big factor that the release of economic data during the last week did not matter a lot to traders and investors, as they preferred liquidation of commodities and high yielding currencies to safe haven – the US dollar.
Since ‘fiscal cliff’ negotiations between the Democrats and the Republicans can continue for two more working days it means the market will resume activities on Thursday, December 27, after which relief period extended on tax and spending will expire, which means imposition of more taxes and less spending unless there is another way out. Hence, market will become extremely choppy and directionless.
Friday’s worsening of Britain’s budget deficit announcement suggests that the UK is going to overshoot its yearly borrowing limit. This was bad news for Pound Sterling that was hovering around the top preparing to attack new highs, but was clobbered.
Though there is mild economic recovery in current account deficit position and service sector, Britain’s economy continues to struggle due to weak growth. It has increased downgrading chances. Last week rating agency S & P joined Fitch and Moody’s and gave a negative outlook on the UK’s AAA rating.
Meanwhile, after LDP’s clean sweep in the Japanese election the BoJ made its first monetary policy announcement and following in the footsteps of the Fed, Japanese central bank announced that it would inject JPY 50 trillion in next 12 months to boost economic growth. It further added that the BoJ will review its MPS next month. It has fuelled expectations that they are still considering new ways to raise inflation target.
Considering BoJ’s current ongoing easing stance and with maximum fiscal policymakers, support because of new government’s intent of extending its stance towards a hyper loose monetary policy, there is huge probability that the combined effort will help them keep the Japanese currency weak. But, presently, yen is extremely oversold as the move so far has been one-sided. Therefore, buying US dollar on dips should be a profitable strategy.
However, due to holiday season trading volume will be thin, market will be choppy and wild moves could be seen so care should be taken and quick squaring of positions will be a preferred strategy.

GOLD @ $1656.70 = Saw a fine dip hitting and comfortably breaking my target before attempting to make a bounce back. Year-end selling to square books after mild easing of European worries and liquidation of assets due to US fiscal tension forced investors to shift funds into US dollars, which is considered safe haven.
Gold has support around $1635-40 zones and if hold it could bounce back from $1645-48 levels; needs to push beyond $1665 for test of $1680. But a break of support levels risk for a test of $1615-20 zones.
Euro @ 1.3187= Euro should initially get protection around 1.3120-40 zones for a test of 1.3250. But the risk is that any failure to move beyond 1.3310 risks for another downside test and a break of 1.3110 is required to pave way for 1.3065. Ranges for the week: 1.2950 – 1.3350;
GBP @ 1.6167 = Bias this week should be on the downside and therefore selling pressure could be seen on the rise. 1.6280 should hold, as see risk for a test of lows on a break of 1.6105 for 1.6050 with a strong support around 1.5950. A break above 1.6320 will open gates for more gains. Ranges for the week: 1.5970 -1.6320;
JPY @ 84.22 = The Japanese currency is overdue for correction, but needs to push below 83.40 on a break of 83.80. However, the risk is that failing to make gains beyond 1st resistance risk for more losses and move above 84.60 could see a possible test of 84.95. Ranges for the week: 82.10-85.20;
AUD @ 1.0397 = Aussies have too many strings attached and therefore quite a few factors are responsible for the currency move. At the moment, 1.0480-90 looks too heavy and a break of 1.0340 could see a deeper correction towards 1.0290. But this currency has too many fans and still has the ability to bounce back. Ranges for the week: 1.0220-1.0550.

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