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ECB Rate Cut Spells More Misery for Euro-Zone Economy Nov 11 – 15

November 10, 2013

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Surprisingly strong US Payroll data against market expectation proving every economist wrong as there was no lackluster increase in hiring, instead 204.000 jobs were added in October that further strengths FED’s case of tapering in the coming months. Last week we have already witnessed a gradual shift in the tone of various Fed officials, as they sounded less Dovish. It certainly gives more space to the Hawks to celebrate.
Last week, they have frequently spoken in favor of reducing bond purchase amount correlating with growth and improving job conditions. Surge in unemployment rate to 7.3 pct from 7.2 pct should not be matter of concern because of October US shutdown causing layoffs in government sector or else unemployment rate should not have dropped.
The timing of October strong payroll data will be extremely helpful because economic activity in USA in the month of November and December always happens to be strong. Prior to US jobs data, release of strong US 3rd quarter GDP growth data was another big positive surprise that should lend further support to the FED scaling down idea.
After 2-consecutive weeks of some important/exciting release of economic reports market may not have too much to focus this week.
Meanwhile, ECB gave shocker to the market by announcing cut in Refi rate by 25 basis point. There is rumor in the market that Germany was against a rate cut, which is understandable because at present, German economy is enjoying growth, whereas other Euro-zone economies are in a struggling mode. Hence, despite positive growth signs emerging from Germany, it cannot alone drag European economy upward and had to compromise on rate cut. French downgrade is a good example of overall European slowdown, though majority of the French may disagree with Fitch’s decision. But at the end of the day this is the price that Germany has to pay for its love affair with the European integration.
I think ECB was looking for an excuse to cut rate and drop in inflation below 1 pct was good enough reason to act. Strong Euro does not suit the global economies to buy expensive European goods, though Draghi was quick to point out in his press conference that the rate cut wasn’t linked to the strength of Euro.
I am not sure that linking Europe’s economic problem with deflationary condition in Japan is an appropriate/sensible comparison or not, as Europe consists of 28 member countries, 17 of them adopted to use Euro as a common currency, but they all have different economic structure/problems, which differs from each other. One good example is that Japan has aging problem and its older population cannot support its domestic market, as it cannot use modern gadgets. Japans domestic debt is highest in the world at 223 pct of the GDP, so where is the similarity. The size of Japanese banks is the largest in the world, though it has numerous problems with 7 pct bad loan it needs to be deregulated of urgent basis.
While, European Central Bank surly has a plan in pipeline, as LTRO is next in line, which cannot be avoided. One of the ECB Executive Board Member Coeure signaled another rate cut is possible if needed, which means ECB has decided to provide liquidity in tough circumstances. This could also be proactive ECB stance to counter FED tapering which is on its way, as any sizable amount of cut in purchase of bond will definitely have spillover effect on the global economy. The rate cut is an extreme measure that has exposed ECB, as it was compelled to use its one of the major monetary tool and is now left with very little option.

GOLD @ $ 1287.50 = The expected down move has occurred nearly hitting target $ 1280. This week we remain bearish for gold and do not expect crack beyond $ 1306 unless $ 1318 breaks. Pressure will remain on the downside. A move below $ 1270-75 will open gates for a test of $ 1250-55 targeting $ 1230-35 zones.
EURO @ 1.3369 = Euro has little reason to celebrate, as the currency has been sandwiched between strong US growth and ECB deciding to chop Refi rate by 25 basis point without any further delay, as there was some urgency. Though European currency did manage to survive sharp dip the downtrend is intact and is likely hold below 1.3450-75, as any upside rally should be capped. A break of 1.3250-80 levels will be 1st hint for more losses and Euro could dip down to test 1.3080-20 zones. However, as the European currency is getting close to 1.30 zones occasional up side correction will be frequently seen that should provide good trading opportunity on both sides. Range for the week 1.3020 – 1.3490.
GBP @ 1.6018 = After weak trade data that was caused due to fall in exports and rise in imports Pound Sterling was unable to maintain its ongoing strength though it remained strong against Euro. Anyhow, the key data this week will be release of BoE quarterly inflation report that will determine future trend.  Release of Employment and Retail Sales report could add fuel to the fire, which will result volatility in currency.
Immediate challenge for Cable will be to surpass 1.6090 levels, which encourage for a move towards 1.6150, which looks difficult. Risk is for a drop and break of 1.5940-50 zones could see a fall towards 1.5820-40 zones. Range for week 1.5780-1.6180.
JPY @ 90.05 = As per expectation Japanese currency traded in a narrow band and I do not see 3rd quarter GDP data having major impact on the currency. I will be keenly looking NIKKIE and 10-Year US Bond for guidance. Nomination of Janet Yellen, as FED Chairman is almost a done deal, but any obstacle could give spin to the currency that could make gains despite all odds.
Japanese currency has support around 99.60-80 and break could spark a move towards 100.30-50, which may not surrender. A move beyond 98.10-20 would encourage challenging 97.50-70 levels. Failure to hold will result sharp gain. Range for the week 94.80 – 100.50.
AUD @ 0.9384 = Aussie did move beyond 0.95 levels but could not surpass 0.9550 levels. I do not see AUD making big gain unless moves beyond 0.9490-20 levels as downside risk would increase if 0.9250-80 breaks for a test of 0.950-80 zones. Range for the week 0.9150– 0.9520.

Twitter @asadcmka………

 

 6:29 AM  GOLD @ $ 1286.50 = Pick top around $ 1287-89 to sell Stops $ 1293……………..
7:01 AM  Asad Sahab, which position u recommend on gbp right now, buy or sell??
7:06 AM  GBP @ 1.6013 = My preffred level to sell would be around 1.6030-40 zone……….
 7:23 AM   sir what abt euro and aud for intraday positions!!
7:27 AM   Its going to be slow day due to NYK Holiday.
Euro should not supass 1.35 levels and may exhaust aroyd 1.3480-90
Similarly Aud range bound trading is expected within 35 pip (+ -)
7:28 AM  GOLD @ $ 1287 = No Chnage in view.
Still prefer selling gold around $ 1287-89 for test $ 1278-80 zones. Stops $ 1293
9:32 AM
GOLD @ $ 1279 = Book your Profit around $ 1277-79……………….Cheers
9:40 AM
EURO @ 1.3392 = Sell around 1.3392-98. Stops 1.3435…………
However, keep in mind that market condition will remain thin……….
12:00 PM GOLD @ $ 1287.50 = Prefered Selling around $ 1288-90. Stops $ 1295………….
 1:26 PM  GBP @ 1.5970 = Book your profit around 1.5965-70……………………..
1:44 PM   sir hold gold sell position where to book profit wait for ur signal
2:42 PM   GOLD @ $ 1283 = Book profit profit around $ 1281-83, as I was waiting for a break of $ 1281 to test $ 1277-78 levels, which did not happen….cheers
2:59 PM   EURO @ 1.3400 = Close Euro position around 1.3395-00, as only break of 1.3385-90 will encourage for another 20 pip dip. But again trading activity dull is thin market condition…..
 3:01 PM  Ok pals, despite dull tarding activty, it was was profitable day……
Cheers until tomorrow…………………

 

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