Monday, Sept 23-27

Asad Rizvi

FED’s decision, not to taper was a big surprise as it was against many odds. But the delay is understandable because of quite a few factors. According to Ben Bernanke the level of growth was not meeting expectation as FED wants to see more progress in the economy linking it to the economic data before adjusting its pace of purchase, which could be one factor.  

FED is aware that it cannot continue injecting liquidity forever and has to apply brakes at some point. The size of money printing has reached to such an extent that further delay to reduce or stop purchase of bond would lead to bigger problems in future, as unwinding size will also increase.

I believe that there is combination of other important factors that has caused delay, such as excessive rise of US bond yield, creeping up of mortgage rates, uneasiness in the stock market and nervousness in the emerging market. But more importantly end of agreement on US debt ceiling that expires around mid-October should be the major cause of concern because this time Obama holds a weaker position after he was unable to obtain vote of confidence to strike Syria and Congressional threat to shut down the government is surly looming over the issue. FED may have sensed that the timing of tapering may not be appropriate as the Congress could clash debating debt ceiling issue that increases the risk to destabilize the financial market.

Meanwhile, next three-four months is important, as the current Fed Chairman will be retiring in January 2014. There is lot of talk about possible Bernanke’s replacement with many even guessing that Dovish in her approach, Janet Yellen is a strong candidate and could get a nod within couple of weeks after Larry Summers decision to step down.

It is interesting to note that lots of investors/traders are betting on Yellen’s appointment that since she is a “Dove”, she may not go for tapering. Yellen is a professional, she knows the importance and the nature of job, she is aware of Fed’s conventional policy stance for years and hence, if assigned with Fed’s job, she will not hesitate to choose the best between two-evil.

Furthermore, market should not be too complacent with the FED’s latest policy stance, as James Bullard one of the FED Voting member in one of his last week’s Tv interview has said that Tapering was a “Close Decision”, which was held up due to recent release of poor economic data. He even hinted that if the economy shows improvement then FED could start to reduce its bond purchases with small amounts, as early as October, as next FOMC meeting is due on October 29-30. Fed decision could be linked with the settlement of US debt ceiling that expires earlier then FEDs next policy meeting.

Next important event of the month is German election. Merkel is likely to win for third time because of her strong domestic economic policies and SPD’s support will helps in forming collation government. It is due to combination of her aggressive stance in domestic politics and in the Euro region that Europe was able to avoid economic collapse, especially when Greece was about to take lead in European collapse.

From Merkel’s CDU perspective key to watch election numbers is obtaining 40% + as pre-poll voting suggest that CDU is currently ranging around 38-40% and 6% + votes for its partner Free Democrats, which is ranging between 5-6% in pre-polls voting. Formation of strong collation with SPD the main opposition party expected to get nearly 26 % support will also suit the current environment. Any number below or SPD taking a lead or is able to form a government may give a shiver to Europe. But what can be more threatening and complicate the overall scenario is if the Anti-Euro party is able to attain 5 pct vote that would enable them to get seat in the lower house of Parliament known as Bundestag. The whole issue should be known in next 10-20 days after the elections.

While, this week market will start focusing from China that will release HSBC manufacturing purchase index that will tell about the health of Chinese manufacturing sector, as fate of Australian economy and currency largely depends on Chinese growth, which is expected to do well. Release of European economic data will be in limelight. IFO German business sentiment data and release of PMI from Europe will provide guideline about the ongoing economic recovery. A combination of Merkel win and economic recovery could push European currency higher in short-term before easing unless there is a surprise.

   

GOLD @ $ 1325.20 = As we are approaching expiry of US debt ceiling date, this time I could sense more tough times ahead for the Obama government. Since the borrowing is likely to exceed, which be the flashpoint because Republicans demand cut in spending, but Obama is unwilling to negotiate on debt limit. Circumstances suggest that the issue is likely to linger on and we could witness excessive volatility in Gold and US Dollar.

Gold that received pounding during weekend could lose another $ 40-50 but, before making a comeback by next week. Technically, we could be heading for choppy trading session. On the down side break of support $ 1295-00 is require for a test of $ 1275 before the up move occurs $ 1250 should hold. On the Up a move beyond $ 1345050 is required to challenge $ 1380.

EURO @ 1.3521 = Well, after Fed policy announcement Euro did break the upside target to gain nearly 200 points. Euro’s upside journey may continue until next month unless there is more clarity on US debt issue. But German election result should be watched carefully, as surprise election result or even a close contest could initially go against all odds.

Bias this week should be up, should hold around 1.3430-40 zones or else 1.3350 for a move and break of 1.3580-90 for test of 1.3625-50

Range for the week 1.3320 – 1.3715.

GBP @ 1.6003 = Trend remains on the upside. Support is at 1.5910, but major support is at 1.5825. Break of 1.6150 will encourage for test of 1.6220-50 zones. Range for week 1.5820-1.6250.

JPY @ 99.27 = Japanese currency may not have enough legs to surpass 97.90-00 zones or else could surge towards 96.70-90 zones. However on break on 99.90 it requires to move beyond 100.50 for test of 101.20-50 levels. Range for the week 97.90 – 101.50.

AUD @ 0.9390 = If Aussie can hold 0.9290-20 levels, AUD will make a feeble upside attempt towards 0.95 zones on break of 0.9450 before exhausting for another dip.  However, break of both the support and resistance level will encourage for a move towards 0.9210 or 0.9580. Range for the week 0.9210– 0.9580.

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.