Monday, December 16-20

Asad Rizvi

This is going to be an important week, as FED will be announcing its last monetary policy for the calender year 2013. Financial market will be anxious to know that if there is a change in its policy stance after attaining 7 pct unemployment rate, which is very close to FED target rate of 6.5 pct and improved economic performance. Though targeted inflation rate dipped. FED officials have been very vocal, linking potential reduction of its bond purchase with the US economic condition.

It is not yet know that if this is going to be FED Chairman Bernanke’s last meeting or not, but after the 2008 US meltdown, he shouldered the responsibility to introduce quantitative easing (QE) by paying a very high price through printing of money against all economic norms. 

FED has so far injected nearly US Dollar 3- trillions to save economy from disaster. It did give breathing space to the economy, which was only possible through introduction of 3-phase of QE in continuation during last 5-years that lacks plan and has no firm backing. This why despite Bernanke’s commitment in June this year that FED plans to do away with the tapering by March 2014. FED is still unsure about its unwinding program. 

After all the progress that the economy is witnessing, my view is that with better US economic conditions the downside risk has reduced to a greater extent that helped in lifting the confidence level. This is why market is pricing tapering. 

However, one fact that should not be ignored is that Bernanke is about to exit and Janet Yellen has been nominated to take the chair. Therefore, if FED wants more time, this could become another good excuse for delay in making tapering decision that gives FED good opportunity to linger on.

This should be the most eventful week of the month, as market will be in a holiday mood from next week onwards until the end of the year. Bias for US Dollar should be on the up and better US economic data will help the sentiment. But if FED does not announce tapering, it will cheers US Bond market, Gold will make sharp gain, US stock market will test new highs and JPY too could correct. US Dollar will be the net looser. However, there could be one more possible surprise that FED gives a January date for tapering.    

If FED decides to taper, then market will be keen to listen to Ben Bernanke’s press conference to get a clue about its future strategy, but if policy stance remains unchanged, then his press conference will be of little interest.

GOLD @ $ 1238.70 = This week, Gold move will largely depend on FED policy announcement. Prior to FED meeting I am expecting gold to trade in a $ 1275 and $ 1202 band, in between the resistance and support levels is $ 1255, $ 1268 and $ 1278 levels. Support is around $ 1218-20 and $ 1198. 

I  will have one reservation if FED remains mum on tapering, because last December closing was @ $ 1687. There are good number of investors still holding gold purchased at much higher levels in hope of bounce back and due to year end closing if FED does not announce reduction in its bond purchase, they will try to push gold higher to support their balance sheets. Whereas, decision to taper will witness more selling pressure. Hence, on the up break of @$ 1288 will open doors for a test of $ 1325-50 zones and I will not be surprised to a move towards $ 1440 in the new year. However, the other possibility is that break $ 1190 will see deeper fall and possibly gold will head for new lows after the US meltdown.      

EURO @ 1.3742 = Euro may continue to show its muscles and is likely to find buyers on dip. This is because expectation of negative rate has receded for the time being. There are quite a few supportive factors, as we often talk of healthy foreign inflows, which means investors confidence in Euro-zone area. LTRO amount is constant decline that indicated healthier ECB balance sheet and reports are that there is a sizable amount of LTRO maturity due this month, it lead towards liquidity constrain. This is why until ECB announces another batch of LTRO, Euro will have the ability to bounce back after every dip or unless Euro-zone’s economy deteriorates. Obviously US tapering will remains on the market nerves and if FED refrains, 1.40 against USD will be achievable.

Initially, Euro will find resistance to crack 1.3825 levels, but is required to fall below 1.3650-70 zones for a dip extending towards 1.3580-00 zones.

On a broader perspective Euro needs to break 1.385 for a test of 1.4080-90 zones and on the downside 1.3540 will encourage for 1.3460.  

GBP @ 1.6295 = There are clear signs that BOE drumbeating for positive UK economy outlook will continue that should give edge to the currency until market realizes that the pace of growth is not sustainable. The real strength of GBP should be based on facts that overall job condition should improves, exports will have to make acceptable level of recovery and trade balance condition should improves. it may take some more time and the economy has to shows consistence performance.

However, with the current pace of in growth in UK, GBP will enjoy demand for investors. Though for upside move Pound needs to break 1.6225 and then 1.6490 for further gains. A fall below 1.6220-30 risks for test of 1.6150-70 zones and only break would encourage for 1.6075.  

JPY @ 103.22 = I have my reservations about JPY weakness, as Japanese currency has solid support around 103.95-00n and at 104.50. Prior to FED announcement any move beyond 104 should by good opportunity to buy Japanese currency with 80 pip Stop Loss, as break of 102.10 will accelerate gains for JPY versus USD towards 101.50-70.

AUD @ 0.8963 = Aussie could not avoid fall after RBA official showing unhappiness with the current levels. We could see another 150-200 pip drop before possible sharp recovery, as market has the tendency to check the seriousness of official statement. RBA can still afford rate cut, which a vital monetary toll unlike other developed nations.

However, AUD needs to surpass 0.9080 to regain its lost confidence, which may not be easy, as break of 0.8880-90 will challenge 0.8820-40 levels for 0.8790.    

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.