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FED Tapering Should Not Be Surprising Event– June 17-21

June 17, 2013
After a cautious start to the week in the absence of any major data announcement, market keenly watched events in Japan, as NIKKEI continued to suffer and Japanese Yen gained strength. Market is still looking for direction and waiting for a clue about FED’s next step towards its monetary easing policy, which is due this week. Federal Reserve is scheduled o meet on June 18-19.
Interestingly, as we approached weekend there was lot of talk about the news report, which appeared in WSJ that Bernanke would adopt Dovish approach and may not hike rates until unemployment falls to its target level of 6.5 pct. This is all guess work and confusion created by the Doves, as they are well aware that whenever FED decides announcing rolling back of its asset purchase, the Doves party will be over. I do not expect FED Chairman to speak unnecessarily on the subject of interest rate hike, which is not relevant as inflation is no threat.
My million Dollar question is that why Bernanke would put a wrong tag and allow his critics to bash him for sounding DOVISH when the economy is doing OK. The common practice is that management always stretches an extra mile by self-praising for all the good work and normally hides all the poor work/weaknesses and hence, gets applauded for the good work. So far, US economic performance has attained acceptable level and I am expecting Ben to show his confidence in US economy that may disappoint the Dove mindset.
This is an sheer attempt by the Doves that fear winding of asset purchase will deprive them of minting money in tons that was suppose to mend the economy. Despite injection of Trillions Dollars, genuine borrowers are still unable to acquire funding to meet demand and now reversal of asset purchase risk hard landing for holders of expensive asset and unloading will be costly. There is also some confusion as FED’s bond program is being unnecessarily mixed up with hike of US interest rate, which is purely based on heating factor. A softer oil price is comforting and right now there no inflation fear. In all probability, FED may start unwinding in a slow process and would watch economic progress and act accordingly, which certainly means no abrupt end to its QE stance. So talking of interest rate hike at this stage makes no sense.
Unlike Mario Draghi I am expecting FED Chairman top adopt practical and realistic approach, as we can take Draghi’s OMT therapy as a good example. He got Europe out of woods for free or without spending a single penny and the financial market is full of praise. But the risk to European economy still exists. Time is running fast and nothing has been done to correct the economy. ECB has succumbed to the Spanish pressure by allowing fiscal space. Europe is still faced with unresolved bank’s capitalizing issue. Balance Sheets of Euro-zone banks are still clogged and banks are not keen to add exposure. Europe is unsure about the fate of German constitutional court’s verdict on its OMT plan that may take another 3-month to decide. German election is due in next 3-4 months and Angela Merkel’s position does not look too rosy. Spain and Italy has funding requirement after the passage for 2-quarters.
During the week market will be focusing on economic numbers to try to make a guess about FED’s next step. But I think G8 meeting that contains an important agenda on monetary policy requires attention. They may be discussing Bank of Japan’s hyper easing policy stance and its impact in the market. Japanese stock has so far lost almost 20 pct of its value from May peak. Hence G8 will surely discuss the possibility of FED’s unwinding of its asset purchase program and its global impact in the market, which is already a disturbing factor and may plan out intervention strategy. Asia looks choppy and volatile and uncertainty until FED FOMC could prevail.
I think next week we could see some nerve shattering moments prior to FED FOMC meeting as G8 meeting around same time. I am not sure if G8 meeting dates were planned earlier or if there is some sort of understanding.  We see nervous start to the week, US Dollar will be choppy, JPY and SFR could be in demand, as tapering is bad news for gold. Market will remain choppy until FED announcement. But I will not be surprised if FED announces slowing down its asset purchase.
GOLD $ 1390.40 = Odd’s this week does not favor gold beyond $ 1405-10, which will be possible on break of $1399. However, downside risk remains high, as push below $ 1370 will accelerate the fall towards $ 1330-35 on break of 1355-60. Or else test of $ 1425-20.
EURO @ 1.3342 = I do not see a move beyond 1.3450, as break of 1.3240-70 levels will encourage for a test of 1.3150. However, move beyond 1.3490 would risk for a test of 1.36 zones. We Range for the week 1.3150 – 1.3620.
GBP @ 1.5697 = If Cable holds above 1.5610, we could see gain towards 1.5775, break will encourage for 1.5815. If seen should be the top for big drop. 1.5440 could be a possibility. Bias could Range for the week 1.5440- 1.58250.
JPY @ 94.04 = Only break of 95.50-60 levels could see more losses for the Japanese currency for a move towards 96.50. However, push beyond 93.40 risks for a test of 92.20. If breaks, I will not be surprised to see test of 89.70-90 zones. Range for the week 92.20 – 96.50.
AUD @ 0.9565 = Aussie should find resistance around 0.9650-80 and only break will encourage for more gains towards 0.9720. But another drop cannot be ruled out on break of 0.9440 for a rest of 0.9380. Range for the week 0.9350 – 0.9750.

 

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