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Strong EURO & Liquidity Crunch Pose Threat to Euro-Zone Economy ? Nov 4 – 8

November 3, 2013
FED policy announcement was the major event of last week. It did not give any surprise, as it avoided altering the language from its previous monetary policy statement and did not commit to reduce its monthly bond purchase of USD 85 billion. Instead it added a positive note with a firm tone about US economy, pointing that the US economic recovery is moderate.
In my previous weekly post, I did mention that the problem faced by the US Central Bank is that it has been maintaining easy monetary policy since 2008, purchasing bond through liquidity injection that has inflated the size of FED balance sheet to USD 4 Trillion. There has to be a stop and in return, injection needs justification at same proportion.
The two FED officials that spoke on Friday did not sound Dovish as they were more concerned about inflation picking up, which also gives hint of change in over sentiment.
The overall conclusion is that FED seems eager to start reducing its asset purchase, but it may be fearing risk that even small amount of tapering could trigger negative sentiment, which needs to cool down a bit.
This week sentiment could shift towards Europe, after drop in inflation rate. There is a desperate need to push growth rate higher and to create more job opportunities. German growth is OK, but may not be enough to maintain stability, as growth in remaining part of Euro-zone region is still low and alarming. ECB may be forced to offer stimulus package.
I have frequently argued and show my reservation about the strength of European currency, which does not suit European economy, because strong EURO makes European goods less attractive and current European growth is not sustainable because banks are not lending on constantly to expand the base of business. European bank are still faced with liquidity issue, Bank Capitalization problem has not been resolved.
European inflation that unexpectedly fell down below 1 pct should provide space to Draghi in his press speech after monetary policy statement may talk of forwards guidance or could hint of discussing rate cut if there is no surprise rate cut. LTRO discussion could also be part of his agenda. If he does not talk of the issues he will surely be challenged in this press Q&A session.
However, despite all the drama and economic distortion about US economic report, focus will not shift from developments in US, as this week US non-farm payroll, an important US economic barometer will be released on Friday. Weak jobs data is already priced in by the market, better than expected numbers will surely help Fed’s stance on tapering. US quarter 3 GDP data will important economic number to watch.

Twitter @asadcmka


GOLD @ $ 1315.50 = This week gold is likely to remain under pressure as $ 1330-35 will pose challenged if tested, which is not a favored move. However, risk is on the downside, as break of $ 1295 will extend losses towards $ 1275-80 levels, with next major support at $ 1250-55. On the up resistance would be around $ 1345-50.
EURO @ 1.3485 = The fall is sharp and deep. Euro needs to push beyond 1.3525 for a move towards 1.3590-00 zones or 1.3640, which is a major resistance levels. However, initially selling pressure is likely to continue and fall below 1.3410 will open gates to challenge 1.3350 or possibly 1.3280. Range for the week 1.3240 – 1.3640.
GBP @ 1.5923 = Cable after strong 3rd quarter performance has lost its upside momentum due to weak release of recent economic numbers. Market will once again start concentrating on growth in manufacturing, industrial and housing sector, which is the backbone of the economy and could suffer if fails to recover.
Cable has strong resistance around 1.6040-50 and break of this levels is required to test 1.6150. GBP could come under pressure and if 1.5840 breaks, it could potentially challenge 1.5780.    Range for week 1.5750-1.6180.
JPY @ 98.61 = Japanese currency will continue to trade in a narrow band unless it breaks major support of resistance level. The currency will give strong resistance and may not surrender 97.40-50 support zones. A move beyond 98.95-00 will help to test 99.30-40 zones or probably 99.80 levels. Failure to surpass initial support levels will encourage JPY to regains its lost strength. Range for the week 96.80 – 99.90.
AUD 0.9439 = Care is suggested as Aussie may find support around 0.9350-70 zones for potential correction and move towards 09550-80. Only break will encourage for 0.9630. However, failure to hold support levels would see a drop extending towards 0.9280. Range for the week 0.9250– 0.9650.
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