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Economic Conditions Have Not Changed Dramatically – FED will Act – Aug 5 – 9

August 5, 2013

Last week market did not witness any major change in BOE, ECB & FED policy stance, though tone of Central Banks remained slightly Dovish. This approach is probably because of the recent release of string of data’s that showed better economic condition, which may have given confidence and some hope of better economic conditions.
However, by the end of the week focus shifted towards the release of US jobs data that came against expectation, as non-farm payroll fell by 22K to 162K. Dismal employment data that was considered the major event of week disappointed trades/investors that had halted the ongoing momentum. Interestingly, what everyone is overlooking is that the Unemployment Rate fell to 4 1/3 year low to 7.4 pct, which is now closer to 7 pct. FED or its Chairman had never discussed non-farm payroll numbers at length, it has always put emphasis on US Unemployment Rate targeting 6.5 pct. I do not think that drop in non-farm number will alter FED’s tapering plan, which only FED will decide not the market.
From market/investors perspective the worrisome factor is that scaling down means withdrawal of liquidity by FED from the banking system that will lead to tighter lending conditions and hence, rise in cost of borrowing. Market will be forced to liquidate asset that will not only reduce profitability, but losses may incur.
The bigger risk is that the size of FED’s asset purchase is so huge that complete unwinding will lead to maturity gaps and mismatches could even lead collapse of institutions and economies. For FED the challenge is that it has to initiate at some point, by reducing the amount first, though in small size to show the world that it has started to act. It is insane to think that Fed’s asset purchase is never ending deal.
Since the economic conditions have not changed dramatically, FED will not deviate from its ongoing strategy. Market will remain focused on the release of economic numbers. Fed officials may continue to confuse the market and the release of Fed minutes on Aug 21 may have more to talk about Fed’s pausing plan.    

GOLD @ $ 1310.95 = Saw another perfect down move as per expectation, but gold got respite from poor non-farm payroll numbers. The current behavior further confirms that gold upside is totally dependent on FED liquidity injection. Then why would sellers not dominate on gold surge when there is not enough demand for gold.
At time I feel sorry for the gold holders stuck up with their expensive purchases, as they often pose themselves as gold Bulls when they confuse the market by trying to mix up paper demand with physical demand. Paper demand has nothing to do with the cost of gold production cost and no one if bothered about the mining cost. I know one thing that unlike speculators/investors/hedge funds, Asian and Middle Eastern physical gold buyers are least bothered about the gold price moves, because gold is mostly purchased against excess cash available to them and is not meant for trading purpose. Therefore, tapering will surely matter for all assets purchased against cheap borrowing if and when withdrawn. Gold future is surely in doldrums and is set to fall until there is another European or Financial crisis, but liquidity squeeze will not help the cause. I prefer picking the top to sell gold, as the Yellow metal remains suspect to tapering talk in the absence of Central Bank buying and support for Asian and Middle Eastern buying.
However, there is a minor risk that after weak payroll data there could be some demand from gold and it is likely to hold above $ 1288-90 for a test of $ 1325-30 levels break would encourage for another move towards $ 1345-50 zones. Break of $ 1275 will confirm resumption on down move.
EURO @ 1.3280 = The confidence in Euro zone economy helped by weak payroll will provide room for some more gains for the European currency, but Euro is likely to trade in narrow band, as USD should retain its strength that will hinder bigger up-move.   
Euro will surpass 1.3325 levels for a test of 1.3390-00 zones. Require to move beyond for further gains. If the up move occurs I would prefer to pick the top, as I do not see gains much beyond 1.3570 for a drop. On the down side break of 1.3210 will once again challenge 1.3150-80 zones. Range for the week 1.3050 – 1.3495.
GBP @ 1.5290 = Cable should find support around 1.5180-00 levels and only break risks for test of 1.5120-30. However, break of 1.5350 will encourage for a test of 1.54670-90 zones. Range for the week 1.5080- 1.5490.
JPY @ 98.89 = Japanese currency gained strength on back of weak jobs data. If JPY fails to penetrate beyond 98.10, the currency may weaken against USD. Break of 99.70 could challenge 100.20 and failure could mean JPY could regain its strength. Range for the week 97.50 – 100.90
AUD @ 0.8899 = Fate of Aussie that depends on many factors that includes both domestic and external economic pressure could bounce back even after RBA ¼ pct rate and could find temporary bottom around 0.8780-20 zones, only break risk for drop extending towards 0.8650. However, break of 0.9020 will encourage for 0.9090 and move beyond risks for 0.9180. Range for the week 0.8740 – 0.9220.
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