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More Misery for Gold,Currencies & US Treasuries – July 8-12

July 8, 2013

We have entered into a new week with lot of clarity after BOE and ECB providing market a clear direction that it wants to maintain and carry on with easy policy stance. The language of 2-Central Banks may differ, but the message is identical that they want easing for a longer period of time, growth and creation of job topping the list.  

In UK, the unemployment condition is comparatively better because it is steady around 7.8 pct for quite some time, but this also indicates that unemployment is not falling due to weak growth and the economic recovery demands stronger growth. If we look into the past data prior to financial crisis, UK economy was enjoying average growth rate of 2.5 pct, which is almost half in the present times and then its unemployment would hover around 5 pct. This could be one big reason that BOE’s new boss Mark Carney may have decided to enter the podium with a stimulus plan to push growth rate above 2 pct as quickly as possible. His disliking for expensive government borrowing further endorses his plan. Looking at his past behavior, he surely is a staunch Dove.
While, ECB President Mario Draghi surely has a task in his hand to take pro-active measures from further financial mishaps in case FED decides to scale down and secondly to make quick amends to bring Euro region’s economy back on the track. Regions unemployment rate has broken all previous record and there no sign of respite.
I think Mario has better sense of German politics. He must be aware of the high risk of possible policy conflict between German Chancellor and its Central Bank boss, but this could be opportune time for the ECB chief to get German government support if needed, as Merkel cannot afford crisis in Euro zone since election is due in September. This time ECB definitely looks aggressive in its stance and means business, as it may not have to worry for Euro’s weakness that should ultimately support Euro-zones economy.
Meanwhile, US unemployment data was last week’s biggest event and now it is clear that why Bernanke was so firm about his scaling back plan. It is important to note is that previously in 6-month period, payroll was averaging around 180.000 jobs per month and after higher revision, jobs per month rose to 202.000 per month. Now I can say with confidence that FED tapering is knocking at the doors. We will get more clues from Wednesday’s release of FOMC meeting minutes.
In my view, FED minutes should turn out to be positive for the US Dollar, because previous months US economic data was showing signs of fatigue/nervousness due to tax and sequester factor that was weighing on the economy. I think FED language could be based on conditionality attached to its tapering move, something that would demand improved economic condition. Unlike couple of months ago, economic condition differs and this could move stock, bonds, currencies and commodity market. It does not matter when FED start tapering, it the market sentiment that should drive the market because they know that they are now close to beginning to slowing of Fed’s bond purchase plan.
Although it is pre-mature to talk of interest rate hike at this stage, which may not happen until next 12-18 months. However, it is extremely important for the unemployment number to fall below 7 pct, which is hovering around 7.6 pct

GOLD $ 1222 = It was yet another perfect week for gold followers, as gold after hitting the top of the range $ 1267 dipped to test the lows of $ 1208 levels. Gold did manage to hold above support level of $ 1202 that saw some investors buying due to unrest in Egypt. But it may not provide enough support to the Yellow metal, as Egyptian protest has pushed global oil prices higher prices.
India, which is the largest physical gold buyer, is faced with multiple problems due to decline in foreign investments and high deficit, it cannot afford rising oil prices, its currency is already under pressure. In a latest move to discourage buying of gold, India’s Reserve Bank of India (RBI) imposed ban on buying against Credit Card on installment. Last month India imposed ban on buying of gold against loan.  So Indian demand for gold will surely thin down.
Furthermore, gold buyers are aware of the economic factors in USA, which is all negative for gold. It is wishful thinking to rely on Japanese stimulus package and BOE & ECB’s easy policy stance for gold support. Therefore, any up-move should be good opportunity to sell gold.
This week I am expecting gold to remain under pressure and should hold below $ 1230-35 levels. Only break here will give room to test upper channel of $ 1250-55. However, once $ 1197 breaks, it will open gates for test and break of $ 1170-75 zones. Bias is on downside for Monday. Target $1187 is intact.
EURO @ 1.2828 = Latest change in ECB’s stance putting lot of emphasis on “Forward Guidance” clearly indicates that weak Euro and softer rate is preferable choice. This gives enough room sell European currency on any rise, which should be short lived. Only break of 1.2890 may allow small move towards 1.2950 zones. I see risk for a drop, break of 1.2750 will encourage for a test and break of 1.2620-40 zones. Break would see deeper fall. Range for the week 1.2580 – 1.2950.
GBP @ 1.4881 = Cable needs to break 1.4820 to test 1.4730 before minor corrective move occurs. However, as a long as it holds below 1.5050, selling interest will be often seen, as downside target could extend up to 1.4680. Range for the week 1.4650- 1.5080.
JPY @ 101.17 = BOJ’s decision on interest rate this week may not bring any change, but Governor Kuroda reaction to recent development or his repetition on 2 pct inflation could provide some spark to the market that could weaken JPY. Surging US 10-year bond yield is also bad news for the Japanese currency. Only break of 100.30 risks for a test of 99.60. However, move beyond 101.95 will encourage for a test and break of 102.50 for 103.60. Range for the week 97.50 – 101.80.
AUD @ 0.9058 = Aussie still have difficult times ahead, but the fall so far is huge and for 200-250 pip correction should always be a possibility. If holds 0.8940-50, we see a move towards 0.9150-80 zones, but needs to surpass for 0.9250, or else 0.8890. Range for the week 0.8870 – 0.9280.

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