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FX & Gold – weekly outlook – February 25-March 1

February 25, 2013

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After an eventful week with Germany earlier responding well to economic measures taken by their economic mangers, it is once again under pressure as German economy was unable to maintain the required growth pace. Other eurozone economies too are struggling to perform, as later the release of economic numbers suggests that a difficult business environment could prolong.
Last week’s European GDP data have already shown a substantial decline. High unemployment rate already peaking to 12.2 percent or over 19 million while job prospects get a setback due to demand for severe austerity measures that do not provide growth space and help revenue collection grow.
Europe is once again faced with difficult times, as the life of its window-dressing policies is clearly too short. It has been proved that window dressing is a temporary solution and not a solution to the problem. Some of the region’s minor economies may have found breathing space, but the European Commission’s growth report has definitely exposed all the recent good talking.
France is clearly off its 3 percent deficit target, spending more and is unable to meet its revenue/savings target. Moreover, Spanish and Italian response could be widely off the target. The EU, which is already aware of slow growth, has no choice and may consider giving an extra time to meet deficit target.
Sensing the economic imbalance all over the region, the European Commission has clearly mentioned in its report that economy will contract. According to it, contraction of 27-nation economy is due to tighter lending conditions.
Surprising, there is no evidence of credit growth despite below one-percent bank rate and over euro one trillion injections in the European banking system, which means money is spent for growth purpose. It is surely because of faulty policies, which are never questioned at an appropriate forum due to whatever reasons.
All above factors in the eurozone region have once again strengthened the prospect of another rate cut in the refinance rate, but it is going to be another futile rate cut exercise unless cheap money reaches genuine businesses or the individuals that can help spur growth in consumer business.
The Fed’s monetary policy committee meeting was another big event of the week that may have turned the table, as we can sense a change in Fed members’ dovish stance. Quite a few members are sounding uncomfortable with its current ongoing QE policy. Therefore, the discussion on Fed’s bond purchase programme will continue in days to come. This could also means that the Fed members that have decided to extend its monthly asset purchase up to USD 85 billion fears about the risk involved, though some of the members were of view that end to Fed’s asset purchase too could soon cause damage to the economy.
It all suggests that in future cracks could appear on the subject of continuation of Fed’s QE policy and hence, a downward adjustment of Fed’s asset purchase amount is surely on the cards. This does not mean that the Fed could be done with their asset purchase programme before they reach the unemployment target of 6.5 percent. But I do see trouble when the Fed decides winding of its asset purchase programme if the inflation pressure continues to grow at a faster pace.
However, this week Fed Chairman Ben Bernanke will be appearing in front of the Senate’s Banking Committee and his remarks will be of vital importance, which should help in providing guidance to the market because of the discomfort shown by many of the Fed members on Fed’s monthly $85 billion bond purchase programme. In order to arrest volatility, Ben is likely to seek to create a balance through his talk, which may not be easy to defend, as he is good for one vote out of 12.
GOLD $1581.20 = Last week, as per forecast, we saw a perfect fall in the price of gold hitting the lows of $1555 before making a bounce back. This week, we could witness some choppy sessions due to Italian elections and the Fed Chairman’s appearance in front of the Senate’s Banking Committee. If Silvio Berlusconi is able to set up or support a government there is a possibility of unrest in the region and there could be three beneficiaries: US Dollar, US Treasuries and gold. Similarly, his loss will encourage US Dollar selling USD-based asset.
Based on above estimates for gold, resistance level is $1590-95, which is likely to hold for a drop or else a break would risk for a test of $1620-50 zones. However, I remain bearish for gold; it needs to fall below $1558-62 for a test of $1540-45 zones or probably $1525.
EURO @ 1.3188 = It all points to a weak euro trend unless Berlusconi loses election and European currency is blessed with some good news. Banks in Europe that obtained cheap LTRO funding have already indicated that they will be paying back less money, which is against market expectations. So there is every reason for a weak euro stance. Picking the top to sell the European currency should be preferred strategy.
The levels to watch on the upside is 1.3350. Only break here would encourage for a test of 1.3480. More dips could be a possibility if 1.3010 surrenders. Range for the week: 1.2950-1.3480;
GBP @ 1.5160 = Pound Sterling that did not get time to take a breather was trying to make a modest comeback and while it was inching up, Moody’s surprised the market by downgrading the UK from its “AAA” credit ratings to “AA1”. Earlier in the week, speculation was that S&P would be the first to act. I think BOE’s minutes made it easier for the rating agencies to get their job done.
I am expecting a volatility and a choppy trading session, as market will try to determine the trend. Next support level is at 1.5010-20 and only a break could target 1.4880. However, a move beyond 1.5250 is required for a test of 1.5350-80. Range for the week: 1.4850-1.5350;
JPY @ 93.39 = an announcement of the new BoJ Governor is expected. This appointment is vital due to Japanese government’s keenness of getting a dovish BoJ governor nominated so that he can support present government extremely loose monetary policy approach and Prime Minister Abe’s visit to the US where apart from Japan-China island conflict, Japan’s currency stance of competitive devaluation could be questioned.
As long as 94.80 get protection buying of Japanese currency should provide an opportunity to book profit. Unless 92.10 surrenders occasional bounce back will be seen as sellers of Yen will emerge on dips. However, a push below could generate some more buying of JPY for 90.50. Range for the week 90.50 – 95.80;
AUD @ 1.0317 = There is no change in sight as Aussie will struggle to make a big upward move, as threats of rate cut are looming. Only a break above 1.0380-90 levels will encourage for 1.0450. But a risk of a fall will increase on a break of 1.0220-40 once for a possible test of 1.0170. Range for the week: 1.0170-1.0450.

Copyright Business Recorder, 2013

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