Weekly Fx -Gold Outlook Monday Nov 28-Dec 02
Sunday Nov 27 - GMT 13:22 - Pak 6.22 pm
Sunday Nov 27 - GMT 13:22 - Pak 6.22 pm
Despite disagreement between the “Super Committee” members, on finding a solution to cut USA’s over 1 Trillion debt, which was a big news was clearly ignored, as all eyes were watching news from the European market. It was a terrible last week with flurry of bad financial news coming from the European market. Failure of German bond auction last week, which is considered safest European asset, further worsened the market condition. We are once heading for another nervous and uncertain week, as another Euro 19.5 billion bond auction is due this week to meet the borrowing requirement of Italy, France, Spain and Belgium. Italian bond yield is already hovering above 7% suggesting that bond auction will be bigger test for the investors.
Meanwhile, Germany is unwilling to compromise on the proposal for joint issuance of bond for the 17-member European countries, arguing that economic condition greatly differs from one country to another country and therefore, it does not support common interest rate structure. This is one major factor that hinders in reaching some sort of understanding between the European countries. Neither Germany favors extraordinary ECB intervention to support the bond market.
Probably Germany/Merkel also wants tighter fiscal control in the Euro region, but is well aware that this measure may not be enough to meet the future debt requirements. Germans worry should be that its growth may not be large enough to cater their own debt due in 2012, so how can they take another country’s debt.
With the piling of so much of negative news that includes enormous amount of EU Debt, surging Borrowing Cost, Bank Capitalization issue, Slashing of various EU Country Ratings and Change of Governments in Euro zone. Yet, there is clear disagreement between the European leaders on many issues.
Furthermore, last week’s German Bund auction failure is quite a worrisome factor signaling that the Investors have started keeping distance from German bonds, what does that indicate? Last week why did the Asian Investors/Central Banks off load their German Bond holdings? Are investors shying away from Europe? How would the investors respond to this week’s auctions? If we look at the quantum of European problem, the most important question in every one’s mind would be the future of Euro. How will Euro as a currency survive? Is Euro ripe for a crash? If this week’s auction fails, will Euro crash? Or will ECB use its backdoor strategy to make this week’s auction successful to save Euro from testing is parity?
Meanwhile, Germany is unwilling to compromise on the proposal for joint issuance of bond for the 17-member European countries, arguing that economic condition greatly differs from one country to another country and therefore, it does not support common interest rate structure. This is one major factor that hinders in reaching some sort of understanding between the European countries. Neither Germany favors extraordinary ECB intervention to support the bond market.
Probably Germany/Merkel also wants tighter fiscal control in the Euro region, but is well aware that this measure may not be enough to meet the future debt requirements. Germans worry should be that its growth may not be large enough to cater their own debt due in 2012, so how can they take another country’s debt.
With the piling of so much of negative news that includes enormous amount of EU Debt, surging Borrowing Cost, Bank Capitalization issue, Slashing of various EU Country Ratings and Change of Governments in Euro zone. Yet, there is clear disagreement between the European leaders on many issues.
Furthermore, last week’s German Bund auction failure is quite a worrisome factor signaling that the Investors have started keeping distance from German bonds, what does that indicate? Last week why did the Asian Investors/Central Banks off load their German Bond holdings? Are investors shying away from Europe? How would the investors respond to this week’s auctions? If we look at the quantum of European problem, the most important question in every one’s mind would be the future of Euro. How will Euro as a currency survive? Is Euro ripe for a crash? If this week’s auction fails, will Euro crash? Or will ECB use its backdoor strategy to make this week’s auction successful to save Euro from testing is parity?
View on Gold: Although gold may look attractive due to global financial problems and lesser available alternate, but it may continue to struggle unless it technically creeps beyond $ 1798. The demand for gold in India is on the decline and the current levels looks quite heavy. Central Banks long in Euro must be worried about future of currency, as market to market of Euro at current levels suggest book loses. Whereas, gold holding means ZERO return for the holders of metal and investment in gold against borrowing means investors have to pay the borrowing cost. Most importantly there is a huge risk for further cash crunch, which could mean further asset sale and pressure on gold.
Sliding of Indian Rupee is bad news for gold. For the expatriate Indians the current levels are too attractive to send remittances at home that offer better return, as correction possibility is always there. While from Indian domestic market perspective 15% depreciation of Indian Rupee means for the local buyer’s gold has become expensive by that percentage. Deteriorating global financial market and increased risk of recession could exert more pressure on Indian Rupee.
Meanwhile, China’s economic slowdown is visible, which could thin down gold demand from Chinese Central Bank/Investors. With high inflation and possible global recession, 10 pct growth rate story since last 20 years may be on its last leg. Its banking system is also at huge risk and in last 3-years lending by Chinese banks surpassed USD 7 Trillion, lessons can be learnt from European debt crisis. It’s all about that when does it happen, if Europe can escapes current dilemma then China may get some breathing space.
Therefore, I am expecting 15 pct - 20 pct fall in gold prices, which is $ 1385, unless gold pushes beyond $ 1790 convincingly. However, we are going to witness volatility. We are often going to witness either way $ 100 moves. So follow me I will keep you posted about the coming moves.
Gold $ 1680 – Gold should hold $ 1760 as I am looking for a downside break of $ 1610, which would pave way for $ $ 1555. Only break of $ 1798 would delay the move. Ranges for the week $ 1580-$ 1760
Euro 1.3237– Only break of 1.3480 would delay Euro’s downside move, as risk remains high for a test and break of 1.3140, which would push Euro further down to test 1.2950. Ranges for the week 1.3480-1.2910
GBP 1.5440. Pressure could mount due to weak economic conditions. Once 1.5350 is cleared Cable could test 1.5250 or else 1.5580 before down again. Range for the week 1.5580-1.5180
JPY 77.71 –Yen is likely to trade in a tight range between 77.10- 79.40
CHF 0.9299 – SFR has strong resistance at 0.9070, which may not succumb as Swiss Franc would follow other currencies. Break of 0.9435 would encourage for a test of 0.9520. Ranges for week 0.9050-0.9520
DISCLAMER : The commentary/information presented is not intended for trading purpose. The idea is to exchange views with the members/readers. Therefore, I accept no responsibility or liability for any losses incurred due to position taking.
