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Economic Performance to Determine FED Stance – ECB May Sound Dovish – Jan 09

January 9, 2014
FED minutes and encouraging reports from the private sector (ADP) that jobs condition in USA is is getting better did not impress the market, as market could be trying to digest the news and waiting for Friday’s Non Farm Payroll report for more clarity. FED language clearly depicts that its committee members are now convinced that bond purchase is not doing the trick of helping growth and is more of a burden as it inflates FED balance sheet, which means it is a costly and risky affair against a very heavy price. Fed minutes also gives a hint that the confidence levels about the overall economic outlook has certainly improved.
One big reason for the confidence in US Bond market, which is largest in size is that it is refusing to accept the fact the FED will completely unwind, as quite a few major players still believe that FED cannot afford end of its bond purchase plan that could lead to financial market collapse because of liquidity crunch.
In my humble view, it is because of the experimental size of tapering, which is tiny at moment to prepare and have better sense of the market. When FED says that the impact of benefits is slipping over time, it clearly hints that bond purchase is no more affordable proposition and since it is linked to economic factors, a good data on Friday or later could do lot of damage and shake the confidence and so will, as the size of tapering get any bigger. It is surely tough to defend 10-year US bond yield of 3-pct or below that could easily surge with the passage of time by another 50-100 basis point, as bearish sentiments will gradually dominate and a move of 25 basis point will become acceptable to market.
Two major events of the day is monetary policy announcement by BOE and ECB, which is unlikely to change rate, but some of the developments is UK suggest that market should keep an eye on the size of BOE bond purchase amount. ECB has a tough task ahead due to German growth is not helping the region to recover as a desired pace and low inflation is now a real cause of worry. ECB may not act, but Mario Draghi very good at choosing his words could use his artistic language to pamper the market and may sound Dovish and talk of liquidity injection. Therefore, a small cut in Refi rate and talk of easing will push Euro further down, but just a press talk will encourage buyers to European currency.
GMT 3:14 – GOLD @ $ 1226.90 = In Asia again $ 1222-23 should hold, as only break of $ 1218 could be threatening. However,  suspect any move beyond $ 1233-35 levels, as selling will dominate on the up. I will not be surprised to see break of $ 1215-18 in NYK for possible test of $ 1202-05.

GMT 3:37 – EURO @ 1.3580 = We could be heading for another choppy day. I am expecting Euro to hold below 1.3620 levels until NYK. Break of 1.3540-50 zones will encourage for a test of 1.3525 levels, which should hold or if surrenders 1.3490 zones could be tested before a bounce back occurs. On the up, 1.3660-70 is the level to watch that could be tested later in NYK session before down again.
GMT 3:41 – GBP @ 1.6450 = Bullish condition will prevail until 1.6320-30 surrenders. However, support 1.6390-00 should hold for a possible test and break of 1.6480 or 1.6515.
GMT 3:45 – JPY @ 104.90 = Jpy is looking for direction a break of 104.60-65 could see more gain towards 104.30-40 levels. However, a move beyond 105.250-30 could extend losses.
GMT 3:48 – AUD @ 0.8880 = This move that I have talking since last couple of days happened. This dip could extend towards 0.8835-50 zones, but caution is suggested if seen, as Aussie has potential and could test 0.8910-20 zones.

Dec 11 -Gold 2014 Target  Break of $ 1000 for $ 800.

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More Later…………………..

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