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FX & Gold – weekly outlook – March 25 – 29: Cyprus dominates global financial market

March 25, 2013

The Fed’s FOMC meeting that was supposed to be the major event of last week was sidelined as Cyprus funding crisis dominated the global financial market. Imagine that how brittle Europe is that Cyprus, which is mere 0.2 percent of the European Union economy, sent shiver down the spine of global financial market. 
Since levy demand came from policymakers, it clearly gives a message to all foreign depositors that their money in banks is not safe; it is left at the mercy of governments/politicians and they can take any decision that suits them. 
This is also a grim reminder to all the global depositors that global norms have changed. They may have control on physical or tangible assets, but deposits kept in banks pose a certain risk, as depositors do have control over the money that they have placed with banks. 
Moreover, if Cyprus parliament does not produce a “Yes” vote on Monday, it could cause unrest in the global financial market, but a “Yes” does not guarantee that such an event may not occur again in future, as Euro have 17-member countries that are faced with numerous financial problems. Banks in Cyprus are on long holidays to avoid run on deposit and are expected to open almost after a week on Tuesday. 
Meanwhile, FOMC announcement had a mildly firm tone on the US economy though cautious as FED did not deviate from its earlier plan as mending of US economy goes on. It may continue its aggressive bond purchase programme of USD 85 billion a month until the economy and job market stabilise because job market can still reverse and hit an alarming 8 percent unemployment level against its target of 6.5 percent, which is expected to reach by 2015. The Fed hinted that if economy gathered pace, it might consider reducing the bond purchase amount. 
Therefore, market will start focusing on US economic data to get a direction. Durable goods data that includes goods that have a longer lifespan such as automobiles, aircraft and appliances are due on Tuesday will reflect a strong consumer sentiment, which will be followed by consumer confidence data. On the same day, New Home Sales data is another very important data that measures housing condition. Home-buyers spend money on financing homes and furnishing that create demand for goods and services that helps in reducing unemployment. 
Revision of 4th quarter 2012 GDP, which is likely to see an upward revision, is another key US economic data which will be released on Friday. It will be followed by initial jobless claims data that will reflect job conditions in USA. 

GOLD $1608 = The Fed did not provide enough ammunition to push gold higher with its balanced approach. It was financial unrest in Cyprus that kept demand for gold alive. But selling interest was often seen and if settlement in Cyprus is announced gold could come under a renewed selling pressure. Similarly, if the problem persists, gold will find buyers on dips. Gold has strong resistance around $1618-20. Only a break risk for a test of $1630-35. But see risk that if $1595 break, gold could dip to test $1575-80. 
EURO @ 1.2985 = The fate of euro will largely depend on developments in Cyprus. Euro did manage to hold despite poor Eurozone PMI data hinting further contraction of economy. This means traders are not willing to short Euro around current levels. However, an agreement on Cyprus issue will help euro spike a bit, but I would prefer to remain cautious, as Euro is now suspect to anything and upside should be limited. 
Support is around 1.2910, a break risk for 1.2840. On the upside a move beyond 1.3080 is required for a test of 1.3180. Range for the week: 1.2750-1.3180; 
GBP @ 1.5227 = Overall it was a good week for Pound Sterling that move in line of my expectations. It did get help from strong economic data, as both retail sales and consumer spending rose that reduced the chances of a triple dip recession. The UK budget too looked OK to me as it did make an effort to create a consumer demand. BoE meeting announcement indicates that they are not happy to see a weak GBP that can trigger price pressure pushing inflation higher. It also voted 6-3 against another GBP 25 billion asset purchase programme preferring to wait for its balance sheet expansion. 
This week, bias will once again be on the upside. Support is around 1.5150-70; only a break would see a dip extending towards 1.5050. I am expecting a break of 1.5280-90 levels for 1.5380. Range for the week: 1.5010-1.5420; 
JPY @ 94.40 = The BoJ did get its Governor Haruhiko Kuroda, but it’s time to deliver as pledges do not work forever. Latest economic data says that Japan is still faced with an economic slowdown that does not support the idea to create inflation. The BoJ has to take quick action to broaden its monetary base by expanding its balance sheet, which means more liquidity injection through the purchase of asset. 
I think market will have to wait until next MPS, which may take some more time and hence, the preferred strategy would be to sell ten and buy USD on dips. Cooling down of Cyprus crisis will also weaken Yen, as Japanese currency benefited from the unrest. Yen gains should not extend beyond 93.40 and could bounce back from 93.70-80 levels. It needs to break 95.25 for 95.90 or probably 96.50. Range for the week: 93.20-96.50; 
AUD @ 1.0441 = So far my assessment on Aussie has been perfect this month, as bias for the Australian currency has been on the up. But I would like to caution investors, as an upward climb of AUD could be getting close to top. AUD needs to break 1.0510 for 1.0550 which could be top. A fall below 1.380 will open gates for 1.0320. Range for the week: 1.0280-1.0550.


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