Monday Jan 20-24

Asad Rizvi

The effect of abysmal December US Payroll data is gradually fading, as I have earlier pointed out in my posts that one bad data cannot be the decider. Release last week's economic numbers does not depict poor health of the economy, in broader terms they fared well. This view got further boost during the speeches made by FED officials, as most of them showed confidence in economy and was less concern with one tome drop in Payroll number, which could be due to bad weather.  

Therefore in near term, US economic indicators and intention of FED officials suggest that it will gradually reduce its bond purchase as per plan also known as measured tapering. The decision on the size of reduction of amount will depend on economic recovery and FED may only reconsider continuation of its easing policy if the economy deteriorates badly. It is now becoming obvious that FED is trapped in a vicious circle and wants to put a halt on it's inflating balance sheet, because FED is well is ware that it  has no available alternate to reduce the size of the balance sheet caused by its unconventional monetary policy. 

To give you a better sense, FED's current balance sheet size of USD 4 Trillion means that the size is bigger than the size of German economy. Since its introduction of unconventional easing policy stance in 2008, FED has so far added almost USD 3 Trillion. It is true that the printing of money or creation of new money helped FED to manage it's over USD 17 trillion debt, but it did not help to reduce or guarantee re-occurrence of future economic/financial difficulties.  

The real problem for the US economy is low revenue collection and to match the spending's if we analyse the USD GDP composition by sector, Agriculture is 1.2 pct, Industry is roughly 20 pct and the remaining part is services that includes large part from the financial sector, which is mother of all the ills that needs to be corrected and balanced according to meet the economic and fiscal needs. Such imbalance certainly has its consequences and the economy has to pay the price unless checked and corrected.

Meanwhile this week, European data may play bigger role because of ECB fear of deflation and slowdown. Release of PMI form the Euro-zone region will give more clue about the business environment in the region, as performance of its manufacturing sector will be keenly watched that should show improvement, as gains in service sector will push business confidence higher.

Rating agencies will be releasing its review of Germany and France, as Moody's have already upgraded Ireland's sovereign ratings. Release of BOE meeting minutes will be another major event that will reflect better picture of its policy stance, as it is reaching its 7 pct unemployment target rate at a faster pact with inflation being another key subject of discussion.

GOLD @ $ 1253.70 = Gold remained under pressure and during the week, as it was successfully picked by sellers for selling on the bounce back. However, late weekend buying due to constant demand because of Chinese Lunar that begins on Jan 31 that helped gold to close higher. This trend will continue, as sellers will take advantage and is likely to dominate selling on the rise. This is temporary move and not change in trend, as FED tapering will spoil the Bear party in near to medium term.

This week too we could see some upside move, as break of $ 1262-65 will encourage for a test of $ 1272-78 zones. However,  Break of $ 1242 is required to challenge support level of $ 1233-35, if surrenders, gold will take further dip towards $ 1220 zones.

EURO @ 1.3539 =  Euro needs to hold above 1.3450-70 levels to make another attempt towards 1.3640-60, which could be possible on break of 1.3610. However, a move below 1.3410, will extend fall towards 1.3350.

GBP @ 1.6411 = Cable needs to hold below 1.6490 to ease buying pressure or else will burst to test 1.6550-80 zones. However, a fall below 1.6270-80 will encourage for more losses.

JPY @ 104.40 = JPY is still required to move below 105.70 for more weakness and test of 106.50 levels. Risk for more gains will increase once 103.10 breaks for 102.20.

AUD @ 0.8769 = I see huge support for Aussie around 0.8650-70, which should hold for 0.8850, break will encourage for 0.8910. If support levels surrender next on the downside is 0.8580.

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.