Monday, Aug 19 - 23

Asad Rizvi

Mixed to slightly better economic condition in US still favor Fed’s idea of tapering that looks possible next month and is keeping market on its toes, as large number of traders/investors still believes that the US Central Bank will reduce its asset purchase. I think Fed will not decide its line of action based on release of next couple of month’s economic data unless it is too damaging. Let’s not forget that labor market, which is one of the key benchmark for reduction in asset purchase is responding well and the unemployment rate is already down to 7.4 pct.

Surge in US Bond yields is clearly showing sign of fatigue, fearing tapering is coming soon. There is nervousness in the global stock market, as few of them have already taken a dip. Asian currencies are under severe pressure in anticipation of demand for US Dollar. This is why large number of borrowers that consist of hedge funds/speculators/investors is pleading for extending the stimulus period. The nature of funding at almost Zero pct is so attractive that they would never want moping of liquidity until it becomes an expensive proposition.

FED may have decided earlier about the coming move with a 3-6 months time period strategy to mentally prepare the market before making the announcement. By now, market has already priced in Fed’s possible scaling down move. If Fed decided to act then its next challenge would be to monitor and manage market volatility. USD 15-20 billion reduction in asset purchase may not have too much of an impact unless the size is larger.

Meanwhile, focus this week will be once again be on economic performance, but Wednesday’s release of July 30-31 FOMC minutes will be keenly watched to get better sense of Fed’s stance on monetary policy. 2-days Jackson Hole symposium on Thursday and Friday, which is a gathering of Central Bank policy experts and academics sponsored by Federal Reserve, is another major event of the week that will not be attended by Fed Chairman Ben Bernanke.

It is summer time and normally major European and US market players take vacation during this season, but there are few major developments in pipeline that has potential to disrupt the market such as Italian political unrest. In Germany, Merkel is looking comfortable to sweep next month’s election, but there can always be a surprise until the election result is announced.

Hence, we could be heading for another cautious week and trading is expected to remain is a narrow band. Overall initial sentiment could be from neutral to mildly bearish for US Dollar with mood gradually shifting towards bias for US Dollar, as we approach Fed FOMC announcement.

  

GOLD @ $ 1376.12 = It was another great week in terms of gold forecasting, as the rally extended to comfortable hit top side of the range. The surge is bit unusual, but not unexpected as hedge funds/investors are making every effort to pull gold and improve its average purchase. This time it is weak stock market that should be blamed for helping gold prices to recover, as funds have possibly shifted towards gold buying, which means gold traders will be eying equity market for more clues. It is also because generally gold trading volume is thin that makes it easier for the key market players to make big moves. This why we often witness excessive volatility, as there is no threat of Central Bank intervention like in currencies.

I am expecting continued uptrend since Monday morning and break of $ 1385 will see a move towards $ 1395-03. On 1^st 2-days of the week, keep a close watch on $ 1415-20, break risks for more gains that could see extension of rally towards $ 1435-40 or else gold rally will fizzle out. On the downside, fall below $ 1355-60 zones is required to test $ 1338.

EURO @ 1.3325 = Euro could not make big strides despite improved economic conditions and Euro-zone coming out of recession. This because there still grey areas that must be bothering the policy makers. ECB’s forward guidance policy must be looming on the heads that threatens continued easing stance if small businesses fail to recover. Neither strong Euro makes European goods more attractive.  

Last week, Euro traded well within the given band and this week too I am expecting 1.3220 to hold until FED FOMC minutes announcement or else 1.3140. Break of 1.3420 is required for a test of 1.3485 before Euro gets exhausted for 150-200 points drop. Range for the week 1.3205 – 1.3520.

GBP @ 1.5622 =  Cable continued to show its muscles extending gains to hit the top side of the given range. I remain cautiously bullish to neutral for Pound Sterling and expecting buying on dips, as I am expecting GBP to test physiological 1.57 levels, but may not have enough courage to hold Pound beyond that level. There is ongoing debate about BOE policy stance on easing, as quite a few believe that BOE may not opt for further easing. I do not think that BOE will mop up the liquidity as the economy is still faced with structural problems and UK Central Bank will not act in haste. Instead, if the recovery is not sustainable, Pound could receive another wave of pounding in coming months.

Though Cable is a buy on dips, but initially we could see a move towards 1.5670, only break risk for a test of 1.5710-20 zones. 1.5780 should hold for a drop. On the downside 1.5530 should hold or else 15470 before up again. Range for the week 1.5450- 1.5750.

JPY @ 97.55 = The volatility factor has reduced to a greater extent, but Japanese currency did not make gains despite Nikkei falling and the challenges faced by the Japanese government to meet its promises is yet to be fulfilled that supports strong Yen.

The levels to watch are 96.70 and only break would risk for 96.10. A move beyond 98.50 would encourage for a test of 99.10-20 levels. Range for the week 95.70 – 99.70

AUD @ 0.9177 = Australian Dollar is gradually losing its momentum and is probably on its last leg of corrective up-move, since the current gain is not backed by economic recovery. Any surge would be result of strong Chinese numbers rather than economic strength that should be short-lived and opportunity to sell Aussie. RBA meeting minutes due on Tuesday may provide more clues about the economy and possibility of another rate cut in coming months.  For further gains break of 0.9250 is required to test 0.9350 zones. However, risk of deeper fall in coming months is a high probability. Fall below 0.9050 will once again open gates for a test of 0.8902 levels. Range for the week 0.8920 – 0.9370.


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.