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FX & Gold – weekly outlook – March 18 – 22

March 18, 2013

Finally, financial market has seen some corrections. Stocks suffered losses and US dollar lost its upside momentum despite signs of US economic recovery. This week, traders’ focus will once again shift towards the Fed’s Federal Open Market Committee (FOMC) meeting, as inflation is up at the highest level in the last 3 years.
Last week’s economic data showed that US jobless claims fell for the 3rd consecutive time, which is good news for the US economy as it will give confidence that the economy recovering and job market is improving.
For the Fed it could still be too early to announce or decide policy shift in it accommodative stance. Let us take the recent retail sales data, which is another important US economic indicator; it is showing signs of recovery. The positive angle about the retail sales data is that despite amendments in the tax rate policy, consumer activity is healthy, which means confidence in economy is on the rise. It pushes the GDP growth and inflation higher that increases the probability of hawkish views of earlier rollback of Fed’s easing policy. More importantly, the impact of sequester will be felt in 3rd or 4th quarter. Calculations suggest that it can crimp growth and this should negate the idea of an earlier unwinding of easing policy anytime soon.
A major event for the Japanese market will be on Tuesday when the Bank of Japan after the parliament approval gets new Governor Kuroda along with two deputies Shirakawa’s exit. Prior to joining the BOJ, Koruda made a promise to do everything to end the dry spell by achieving 2 percent inflation target in the next 2 years. Japan has been suffering from deflation for the last 15 years.
Despite enjoying a 5-year growth period between 2002 to 2007, Japan’s economy could not come out of depression, as it required structural changes that could only be possible through parliamentary changes with a two-third majority. From its all time high Japanese currency fell nearly by 28 percent against the US dollar. It is time that the BOJ took action as pledges will not work for ever. Therefore, the BOJ should soon announce its promised massive stimulus package and the government is required to table its structural reform plan or else market could soon lose its patience.
Meanwhile, Pound Sterling that was looking for some excuse to recover got the required lift from BoE Governor Mervin King’s statement that the currency is “Properly Valued”, fearing a further fall may add inflation fear. I think this should be enough for now because last month it was his statement calling for a weak GBP that dented the British currency.
However, injection of liquidity through its so-called stimulus package will remain a threat as it is bearish for the currency. Two factors that will help in determining the trend will be the economic data and coming 2013 budget, which will be keenly watched. So it may be too early to say that if we have seen the bottom or if Pound is still overvalued. But looking at the behaviour of government’s response and the Central Bank’s stance on currencies of some of the developed economies, I comfortably say that instead of protecting, there is surely a silent policy shift towards its currency and so could be the BOE’s stance.

GOLD $1591.50 = Saw demand for gold as per expectation. But what should be concerning is the volume, as turnover is thin. Traders are required to be careful. Reports have appeared in a US journal that top US derivatives regulator are having internal discussion on weather daily setting of gold and silver prices in London is open to manipulation though the Commodity Future Trading Commission did not launch a formal investigation, but are looking at the price fixing mechanism from various angles. This could be bad news for the yellow metal and I treat this as bearish news because gold is up on sentiment of excessive liquidity due to a global easing policy and if correct then gold investors may avoid trading in gold. We may not hear more on this anytime soon, which may take some time.
However, since I am expecting continuation of Fed’s dovish stance I see gold making some more gains during 1st 3 days of this week. But seller should pick the top.
Big support lies around $1570-75 levels, which may hold. But once $1604 surrenders $1615-20 will be challenged. Do not sell interest beyond $1630. On the downside, a break of support will encourage for a test of $1658;
EURO @ 1.3072 = No change in strategy as I will prefer picking the top around 1.3150-80 zones. Unless euro breaks above 1.3250, the European currency will be a good sale; it needs to fall below 1.2980 for a test of 1.2910. Range for the week: 1.2880-1.3250;
GBP @ 1.5113 = Pound Sterling needs to break and close above 1.5280 for some stability. I doubt that up move beyond 1.5220 will be possible in present environment. A break of 1.5040 could threaten to challenge 1.4950. Range for the week: 1.4850-1.5280;
JPY @ 95.25 = The challenging level is 96.80-90, which looks difficult to break; a move beyond this levels will encourage for a test of 97.50, which looks difficult. Gains for Japanese currency could accelerate if it moves below 94.20 and may challenge 93.20. Range for the week: 93.20-97.50;
AUD @ 1.0406 = Bias will remain on the upside, but a move beyond 1.0480 will be tough, as top should be around 1.050 levels. Strong support is at 1.0320; a fall below support level could extend up to 1.0250. Range for the week: 1.0240-1.0520.

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