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Tapering to attract US Bond after plunge, USD Dearer & misery for Gold – Sept 16-21

September 15, 2013

As we get closer to the important coming event of the week when Fed is due to meet on Sept 18 and is expected to give its verdict on tapering after the conclusion of FOMC meeting. Release of weak US Retail Sales and Consumer Sale data on Friday gave another blow to the scaling down sentiment following previous weeks drop in August payroll data. But decision will not be based on weekly economic report. The other positive factor that supports FED’s idea of tapering is that inflation is too low, which needs to slightly pick-up within the manageable level. Low inflation endorses FED Dovish view on interest rate, as it assured earlier to maintain low interest rate and will emphasize on forward guidance.

I would stick to my June view that bond purchase amount will be reduced and initial tapering amount should range between $ 10-20 billion that should help in providing quick stability and confidence to the market. Any delay could a temporary, as I still see tapering happening before Ben Bernanke’s term end in January 2014.
FED Reserve Chairman in his 1st tapering hint in June has clearly said that it could begin to taper its purchase of bond later this year if the economy continues to improve as FED wants. He further added in his follow-up press conference that FED could end bond buying completely sometime in the middle of next year, if all goes well according to plan. If we assess the over overall economic condition, it has definitely improved.
Initial FED announcement in June was surely made after the final decision on tapering was taken by its members, which could be subject to delay, only if the US economy goes burst, which did not happen. Though FED did not give eventual timing of its tapering plan, but during this period FED gave enough time to the market to prepare and adjust accordingly. The yield up-move in bond market is obvious because the size is huge and similar unrest was seen in the emerging market that began losing its charm after June policy announcement, as it is too dependent on foreign borrowings. The estimated liquidity injection by FED is $ 2.75 Trillion.
There is lot of talk that tapering will cause US 10-year bond yield to surge sharply, which is already hovering around 3 pct and once made a brief test. In my view, whenever FED decides to taper market will have face volatile session after the announcement. But let’s not forget that during last three months huge amount of money from emerging markets and elsewhere was parked in Europe, which is still in a struggling mode. I think if FED decides to scale down its bond purchase plan that may give another 50-100 basis point surge in bond yields that could be too attractive for funds to shift towards US market. This in turn will create demand for US Dollar and more bashing of Gold could be seen. However, any delay in FED decision will allow market to correct.
GOLD @ $ 1325.05 = Saw another perfect hit of my weekly target $ 1335, as fall extended to test $ 1306. During this week, we could see some choppy trades prior to FOMC announcement. Top around $ 1360 should hold, as bias to remain on the downside. Therefore, preferred strategy is to pick top to sell, as see risk for a move down to test $ 1280. On a broader prospective the crucial level to watch is $ 1375-80 on the upside and $ 1210.
EURO @ 1.3292 = Euro did break 1.3280 for a test of 1.330, as overall tone remains strong. However, this week’s crucial level is 1.3395-00, unless makes convincing upside break, risk for losses will increase. A fall below 1.3210 will open gates for 1.3150 or 1.3070. But upside break of resistance level encourage for a 150-200 basis point move. Range for the week 1.3050 – 1.3580.
GBP @ 1.5866 = Upside move was quite in last week’s projection, but the rally extended gains unexpectedly hitting 1.5882. Bias to remain on the upside, as with tone against cross currencies will remain firm. Break of 1.5925 is required to test 1.60 or else a move below 1.5740 will threaten to challenge 1.5650. Range for week 1.5620-1.6040.
JPY @ 99.35 = Nikkei and US 10-bond market are two indicators that should be watched closely. Sharp fall of Japanese stock will encourage heavy buying of Yen and surge in 10-year US bond would weaken JPY. On any JPY weakness, I would still keep a close watch on 100.70-90 levels, as Yen may find buyers dip below 98.70 will open gates for test and break of 98.10 for 97.10-40 zones.
Range for the week 97.10 – 101.50.
AUD 0.9241= Upside momentum has surely broken and now 0.9350-80 is the barrier. AUD needs to break 0.9150-70 zones to extend losses and is likely to trade in a given range. Range for the week 0.9080– 0.9410.

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