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Europe need Weak Euro – Rate Cut & Cash Injection. Apr 29 –May 3

April 28, 2013

Last week market saw quite a few disappointing US data, except for the new home sales. The economy is having impact of sequester and minor adjustments that was made in tax structure. Neither there was good news from Europe, as the release of economic data revels that Europe is sliding towards recession. The only surprise of the week was the release of stronger than expectation of UK’s GDP data that proved everyone wrong avoiding triple dip recession.
There are quite a few events this week. The important ones are rate decision by FED and ECB. On Wednesday, FED will announce its interest rate decision that will be followed by press conference. Nothing very unusual is expected, Fed may try to balance out and take time to make a serious comment after recent bad patch of economic data, which is more because of sequester and tax related matter, prior to the release of successful release of batch of data’s in the past few months. I will not be surprised to see Payroll once gain roaring in coming weeks because the impact of sequester and tax reforms could be over in next few weeks. However, FED Chairman Bernanke’s tone in his press conference may give some hint about the next direction. 
More importantly ECB interest rate decision will be keenly watched. ECB has a history of maintaining its Hawkish stance, as price stability is its key responsibility. Economic slowdown in Euro-zone regions for past many months has exposed the ideas of Mario Draghi, as it was all talking. Euro did manage to stabilize after Draghi’s theory, but the current strength of the European currency does not bode well for the economy. It either needs to slash rates and inject liquidity or should allow Euro to slide by another 10 pct.
With inflation 1.7 pct in the Euro-region, I am not sure that how effective another rate cut will be for the economy because it only allows borrowers some space as lending gets cheap. Combine recipe of weak currency and liquidity injection is a proven formula that not only helps exports, but also attracts tourism and service industry. And do not forget that European banks are still clogged due to bank Capitalization and I have often mentioned in my post that banks are in dire needs cash money.
But unlike FED that with few votes can pass uncountable number of computer entries to expend its balance sheet and is only answerable to its government, ECB that consist of 27-nation, 17-of them use Euro as their currency is required to obtain approval at various levels. Since ECB and Euro-zones rules are very tough, to make amendments and to avoid violation of rules it is frequently required to obtain government approval to bring legislative changes. So frequent liquidity injection is by no means is an easy task for ECB that has to pass many hurdles.
Bottom line is that ECB could buy time and go for hold with Dovish stance in coming MPS, but there is higher probability that ECB could go for another 25 bp rate cut that should help borrowing cost, which may not be enough unless it promises liquidity injection, which is commonly known as stimulation package, as European economy is in desperate need of dual action by ECB. 

GOLD $ 1461.40 =  The expected up move has occurred stretching a bit beyond my expectation. Gradually gold buyers came out of their shells, which saw physical demand for the metal on the rise helping prices to recover. But late sell off on Friday in New York should be taken as warning that hedge funds still have the linking to sell on the up.
I do not favor buying around or close to $ 1500 levels, as resumption of gold coin sale by US mint will add to selling pressure. FED’s softer stance on QE and Dovish ECB approach with combined action of policy rate cut along with stimulus package will support gold, but any deviation would result sell off.
Strong resistance is around $ 1480-85 break is required for a test of $ 1505-10 zones. However, see risk for a fall, break $ 1440 will encourage for $ 1420, as next target is $ 1375.
EURO @ 1.3030 = Bias this week will be on the down side. Needs to make a clear break of 1.3150 for 1.3250, which is not a favored scenario as, break 1.2920 will open doors for 1.2870. Euro Range for the week 1.2850 – 1.3250
GBP @ 1.5469 = With threat of triple dip recession over, though inflation number remains on the higher side. Since next MPS is on May 9, I would prefer buying Cable on dip as it is expected to adopt stronger tone. Cable has strong support around 1.5350, which should hold and is likely to bounce back from 1.54 levels. It needs to push above 1.5540 for 1.5590 or possibly higher. Cable Range for the week 1.5350- 1.5650.
JPY @ 98.07 = Japanese Yen will make some more gains, as of now 100 Yen looks at quite a distance. BOJ seems to have attained a comfortable level for the time being. Suspect that market will challenge 97.10 and there is s a good possibility that Yen could make further gains. Yen may not scuba beyond 98.90 with ease and only break risk for 99.50, which is not a favored move. Range for the week 96.20 – 99.50.
AUD @ 1.0266 = Support is around 1.0150-70, only break risk for 1.0110. However, resist is at 1.0325, break would encourage for 1.0375. Range for the week 1.0110 – 1.0390.

 

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