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Euro gains will be short lived – May 06 – May 10

May 5, 2013

The two big events of last week was monetary policy announcement by FED and ECB and nonfarm payroll numbers, it is all over as market will be focusing on coming. FED did nothing usual, as it mildly twisted the language by adding that it can increase or reduce the pace of purchase to maintain appropriate policy accommodation depending on the outlook for inflation and labor market changes. This is a routine type of statement, everyone knows that in inflationary condition QE amount will either be reduced or withdrawn and if job conditions deteriorate, continuation or more QE is possible. I think this was a balanced and calculated move adopted by the FED, which is good enough to counter all speculative moves. In short FED maintained its USD 85 billion asset purchase program.    

While, evidence is suggesting that what ECB said about the possible economic recovery few months ago, due to measures taken by the European policy makers is untrue. Europe is witnessing one of the most difficult times because of rising unemployment in 17-nation that uses Euro, surged to 12.1 pct. Policy makers demand for adopting extreme austerity measure was a blunder. In present economic environment it is an unhealthy and unproductive exercise, which does not promote growth, It neither create jobs nor help increase in revenue collection, forcing ECB to make a shift in its fiscal policy stance.     

I think US payroll data was far better than expectation and if we combine previous month’s payroll data that was revised upward along with April payroll numbers, then on average, this year’s payroll data is comfortable above 200.000 marks. Unexpected drop in unemployment rate to 7.5 pct was the most pleasant surprise, which should keep FED’s hope alive that market is on the recovery path and recent damage caused to the economy was temporary. There will be plenty of talk on MPS and economy by FED officials this week that should keep market engage. Economic data as always

Meanwhile, Cable has so far made a good comeback. Manufacturing and construction activity in UK is gradually inching up suggesting that overall improvement is now visible. BOE this week will make announcement on its policy rate stance. They will probably keep rates on hold and would want to buy some more time and refrain from expanding the size of its balance sheet through liquidity injecting.

GOLD $ 1470.40 = It was quite a mixed reaction after the US payroll data, as gold price movement did not bother much despite better jobs number. ECB easing surely helped the sentiment, but it was simply borrowing cost reduction and not the liquidity injection. There must be some optimist view about more physical demand, especially in shape of coins and bars. Physical buying demand from China and India was another major factor that supported gold price recovery, but with resumption of gold coins supply and shying of physical buyers due to higher gold price, the metal is likely to come under pressure. With the easing of pressure from Europe, cooling down of aggressive Central Bank buying and economic slowdown in China gold looks less attractive.
We could see a small up move before the fall occurs, as break of $ 1480 is required for a test of $ 1485-90 zones, which is not a favored move, as break could challenge $ 1515. I am looking for a break of $ 1460, which will encourage a dip to test $ 1452 or $ 1444.
EURO @ 1.3113 = Despite positive US jobs data and 50 bp rate cut Euro did not react. Rate cut has given strength to bond yields, which will reduce the borrowing cost that has helped Euro to maintain its firm tone. I do not see continuation of firmer Euro trend, as investors/market players will soon realize that Euro does not have the interest-rate differential advantage and hence, holding of Euro does not make much sense. While, economic condition in Europe is still brittle.      
Break of 1.3195 is required for a test of 1.3225. However, I am expecting selling interest on the rise. Fall below 1.3030 will open gates for 1.2960 and if fails to hold, more losses cannot be ruled out. Range for the week 1.2920 – 1.3290.
GBP @ 1.5573 = Tone of Cable to remain strong, buying on dip around 1.55 levels is preferred, as support 1.5440 should not surrender. A move beyond 1.5620 will challenge 1.5695. Range for the week 1.5450- 1.5720.
JPY @ 98.95 = I am yet not convinced that this move could extend beyond 99.50. Break of 98.20 will a see a move towards 97.50-70 zones. Range for the week 97.20 – 99.90.
AUD @ 1.0314 = Aussie could be volatile this week, as resistance 1.0350 should be tough to crack. Only break will a move towards 1.0390. However, bias could be on the downside and needs to push below 1.0210 for 1.0170. Range for the week 1.0150 – 1.0390.

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