Monday, January 27-31

Asad Rizvi

Focus this week will be on FED Monetary Policy announcement, which is one of the major event of the month. Market is fearing further reduction in FED bond purchase amount that has caused turbulence in emerging markets.China is blamed to have given the lead after fall in its manufacturing sector. Extraordinary growth in China has helped emerging market and to some extent developed markets to sustain growth during crisis period, as its economy since last 3-decades grew at an average of over 10-pct annually that has now fallen to 7 pct.

Earlier in my “Global Outlook 2014″ post, I had already warned about the meltdown possibility. It is important to understand the maths. In true sense, China has engaged US in vendor finance, providing the money that helps finance the huge US fiscal and trade deficits, allowing Americans to buy more and more goods with the purported ability to make choices free from fiscal constraints.

China has strong economic ties with the emerging market economies and Australia is too dependent on Chinese growth. Similarly, Brazil, South Africa and other economies have close links with China and is suspect to weak Chinese growth. Basically its a contagion that may have adverse consequences, which can have spillover effect to all inter-connected economies.

Due to its financial size, USA is without any doubt global growth engine. It frequently provides financing facilities to global economies through cash injection and by enhancing swap facility limit for liquidity management so that they can meet its trading requirements. Now there is growing fear that withdrawal of FED bond facility will ultimately lead to liquidity squeeze if USA decides to do away with its bond purchase.

The meltdown in the emerging markets is the reaction of retail investors. The large size investors have so far managed to keep control on the nerves.  If the institutional investors decides to shift their portfolio, flight of capital could cause havoc because of draining of funds.

I think discussing this week’s other economic events will not be too helpful for guidance, as global financial market will wait for FED announcement. Delay or no change in FED stance/strategy  would mean correction, but increase in tapering amount would certainly mean more gloom for the Doves.

Trading is currencies will largely depend on the behavior of emerging markets reaction and be moves in the stock market, as continuation of nervousness may encourage flows towards JPY, SFR and to some extent towards Europe. Surge in US may add pressure on USD. Gold could be naughty and volatile, as sellers may wait to pick the top to sell.

Apart from Durable goods, US housing and consumer confidence data may have weaker tone. But what I fear most and support the view that US Dollar will be the winner at the end of the day, as I am expecting FED to further trim from its monthly asset purchase amount. Market to remain choppy and volatile, so better watch out.

GOLD @ $ 1268.70  = Last week I have highlighted that demand for gold may stay due to Chinese buying as they will be celebrating Lunar year.  I still believe that this trend is temporary and should be short lived. The fate of gold future is not too bright, which is too dependent on FED tapering stance. Continuation of $ 75 Billion tapering amount may give gold another $ 40 - 50 jump, but reduction in FED bond purchase amount could see new lows.

Gold could initially surge to challenge $ 1275-80 zones before easing, but may hold around $ 1248-55. However, on a bigger note, during the week, break of $ 1298 will challenge $ 1232-28 zones  and break of $ 1235-40 will challenge $ 1190 for a move towards $ 1124.

EURO @ 1.3675 = Euro up move will depend on break of 1.3750-80 for 1.3850, which looks difficult. A fall below 1.3580 will encourage for a move towards 1.3490-00. 

GBP @ 1.6476 = Pound Sterling lost some of its gloss on Friday, after Carney's comment that BOE may consider other options for forward guidance. I think the pace of recovery is fast and strength of GBP does not bode well for country's export, so BOE Governor is trying to cool down the momentum. Analyzing recent UK data, GDP growth is likely to remain strong that may encourage buyers to re-enter the market. 

Initially, GBP may hold below 1.6550, as break of 1.6370 is required to open gates for 1.63. If dip is seen caution is required for bounce back, as 1.6240 support should hold for another upside attack. On the upside a move above resistance level could challenge 1.6660.

JPY 102.19 = JPY move will depend of two major factors this week. NIKKEI and USD Bond yields. Weak opening of Asian stock market could would help Japanese currency to make further gains, similarly further gains in US bond yields may push JPY higher and any reversal would have adverse impact on Yen. 

JPY needs to move beyond 102.80 for 103.50 or else there is risk for further JPY gains. Break of 100.70-90 zones may encourage to challenge 100 Yen. Bias strong.

AUD @ 0.8678 = I have always highlighted that Australian Dollar is too dependent on Chinese economy and weakness of cracks appearing in Chinese economy is bad news for Aussie. 

Aud needs to push above 0.8770-8- levels for 0.8820, which looks tough right now, as fall could extend towards 0.8550. If breaks, it should find support around 0.8480. Bias weak.

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.