Monday, October 21-25

Asad Rizvi

I think the way US debt limit deal got extended, it will not be wrong to say that the problem is temporarily sorted out and there is more piling up in the pipeline? Surely another global financial mess has only been averted, as sequester issue will be raised and discussed in mid-December gathering and by the end of 1st quarter of 2014 market will once again start discussing expiry of US debt limit date.

This is an unending issue, as the size of US debt is over 20 pct of the size of global economy that cannot  be cured  without  taking years of  combine  steps by increasing revenue and  simultaneously  by  decreasing  in spending. The problem is that the Revenue can never be increased because politicians would not be willing to take  unpopular   measure to  hike tax rate  or  introduce new  taxes  and  spending  will never  be  squeezed because   reduction  is  spending   would   increase  unemployment  rate  that  would choke  growth. This  is why, though money  printing can be reduced  to some  extent, but cannot  be  halted. Without  availability of funds, banks  Capitalization requirements  will not be  met, financial  holes cannot  be plugged, which means weaker balance sheets would ultimately lead to financial collapse. I do not want to call this fudging technique, as they are all  smart accounting  entries/techniques  required to show that the books are square and balance sheet healthy.

But is this the real side of the coin? Does this justify “AAA” or high rating status? Not really because it is artificially done. Then why rating agencies are mum on the subject and only Chinese rating agency had to take the extreme step to downgrade US debt to (minus) -A from A. Who cares that weather SEC recognizes Chinese rating agency "Dogong" or not, but the reality is that the global market reacted to the Chinese rating agencies news flash. We should not forget that China is the biggest stakeholder of US Treasuries and it has every right to call shots. Banks and financial institution’s preference should be to have its own strong team of expertise to calculate and assess real risk factor rather than being too depended on outside report.

The ongoing political  tension about US debt limit increase or cut has now become a very regular event. It is certainly  worth  asking  he rating  agencies about  USA's AAA  sovereign status. The  temporary debt deal could be good for few months or for  couple of years, but  the reality  is that  it did  not improve  the  deficit position and the ability of the country to repay debt in long term.      

With the overall development it seems that the chances of tapering delay has brightened that could be postponed until next year unless FED has decided to act. Washington agreeing to extend time limit of debt period will help stock market to stabilize, it will ease pressure on commodity prices, but US Dollar may not enjoy from this move.

Imagine, cost of recent shutdown is estimated to be around USD 24 billion, then with the monthly FED injection of USD 85, how much the US economy benefit in return? The question that remains unanswered is that FED has opted for easy monetary policy stance since last many years, for how long and how much does the FED want to support US economy and in return what are the expectations and gains for the US economy and where will it end ?

If we move ahead to watch the events of coming weeks, the slew of US data that has been delayed due shutdown will be released that will provide clearer trend.   

GOLD @ 1316 = Though US debt issue has been temporarily resolved, but the news has been supportive for gold. Chinese rating agency’s slash of US debt to minus “-A” also gave push to the Yellow metal. This week gold move will largely depend on US economic report. Especially the release of backlog of economic data will provide guidance.

Initially bias will be on the upside, but needs to surpass $ 1325-28 levels to test $ 1338-40. However, I do see move much beyond resistance level of $ 1340 or else $ 1365. On the downside $ 1297-00, should hold or else watch for break of $ 1290 for $ 1275.

EURO @ 1.3685 = Bias should be on the upside, as long as 1.3540 holds for a move towards 1.3780, break would encourage for test of 1.3820-50 zones. But rally could exhaust for a dip to re-test 1.3620-25. Any move below 1.3470 will delay upside rally. Range for the week 1.3520 – 1.3885.

GBP @ 1.6165 = Cable has strong support around 1.6040-50 and is likely to hold for up move or else may test 1.5950. I am looking for a move towards 1.6250-80 zones, only on break of 1.6220, but upside rally should exhaust for 150-200 pip sharp drop. Range for week 1.6020-1.6290.

JPY @ 97.69 = Japanese currency may not weaken beyond 98.70, as see risk for gains on break of 96.90 for 96.60. However, unless JPY surpass 96.10, risk for bounce back is possible, or else 99.20. Range for the week 96.10 – 98.90.

AUD @ 0.9674 = Aussie next resistance level is 0.9750, needs to break for a test of 0.9820. On the downside break of 0.9580 risks for a test of 0.9510. Range for the week 0.9510– 0.9820.

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.