Monday Feb 3-7

Asad Rizvi

The tapering topic is not over as yet, FED has acted twice and this is a clear sign that it will not refrain from reducing its bond purchase amount, which is a burden on its balance sheet. Initially, market did react prior to FED announcement, but now seems to have somewhat settled down for the time being. Its not all over as yet and more gloom for the borrowers could be on the way. 

The impact of withdrawal of stimulus will be gradually felt before or at the time of maturity/rollover, but it will also subside with market taking dip, as the fall cannot continue forever or unless checked by FED. The risk is high that it will have an spill over effect on the emerging markets that can extend up to developed economies.

What I am more concerned is about another active debate brewing up that "Fed tapering does not mean tightening", as both are co-related to each other. It is very simple that Fed has been injecting liquidity because market needs funding. Market still, demand extra money for its survival to meet Capital requirements and valuation, as window dressing is no more an sustainable alternate. Since there is no excess money available and no extra effort has been made for real economic growth that could have helped to pay back the Quantitative Easing (QE) money or other borrowings the financial risk is obvious after FED latest stance. 

There is always limit to lending of money, as the lender can stretch to a certain limit. So what is justification that if funding is not made available or funds are not rolled over, this will not result tighter money market condition. Therefore, in my view, both interest rate hike and tighter money market condition is tightening. Central Banks cannot escape from reality by confusing the market by making statements. If you look at the past history, they always keep defending their wrong policies by making incorrect assessments, which goes unchecked, as they are never challenged and the decision maker goes unpunished. Chosen few are the real beneficiaries at the cost of majority. Central Banks often misguide/distract the market by not discussing/disclosing the real facts probably fearing unrest. They never warn of possible financial collapse that has frequently happened in recent past. Instead they use protective language to obtain cover for themselves from crisis, which is why, crisis occurs on regular basis. 

Therefore, conclusion to this discussion that "Fed tapering does not mean tightening" is that Hike in Interest Rates means that an absolute number is given by the Central Bank. Whereas, Tapering, Moping, Draining or Withdrawal of Liquidity from the Banking System also means Tightening, which is slowly or gradual removing of  liquidity, where Central Banks benchmark rate becomes ineffective with different velocity. But lending/borrowing rate could exceed the benchmark Central Bank rate and may becomes expensive. So, market pain will gradually increase, as FED continues to reduce its bond purchase amount that could exhaust market patience at some point resulting sharp swing. 

Meanwhile, we are heading for an active week as good batch of data will be released from USA that will include Purchasing Managers Index ( PMI ), Factory Orders,  ADP Employment Change, Trade Balance and  Initial Jobless Claims. But Non-Farm Payroll and Unemployment Data is the mother of all data that will provide another important guideline about the progress US Job market. It is possible and I suspect that previous data could be revised upward, which came extremely poor due to bad weather condition in USA. Previous data may have been incomplete, as reaching people was a tough ask. 

Similarly, Europe too will be in limelight because of the release of some important economic data. ECB and BOE will be announcing its decision on interest rate, which should remain unchanged. The growth prospect in Euro-zine region remains a matter of big concern for ECB policy makers that has downside risk, which is a cause of deflation that risks for monetary easing possibly in the coming months and not this week. BOE is also unlikely to alter its ongoing policy stance. Though fall in UK unemployment rate and heating of housing sector is inflation friendly, but BOE will neither hike its rate soon not it will reduce its bond purchase amount.

GOLD @ $ 1244.50 = It was a perfect week, as gold traded well within given band and as per weekly strategy hitting both top and the bottom targets. There was no break out of support and resistance levels. This week gold should struggle to move upward in the absence of of any solid reason, as Chinese New Year buying is over. This week too any up move would be perfect opportunity to pick top to sell gold. 

Recent economic ad financial development suggest that gold does not have enough legs to surpass $ 1300  and to reach that level it need to break $ 1275-80 barrier, which is not a favorable scenario, as potentially any up move should exhaust around $ 1265-70 zones. I would favor dip and looking for fall towards $ 1225 zones. A clear break of $ 1210 is required for extending losses that should hit $ 1147 on break of $ 1175 in Short to Medium-Term.

EURO @ 1.3485 = Tone of Euro to remain bearish this week with bias on the downside and up move could be good opportunity to short Euro unless European currency is bale to surpass 1.3625-50 barrier. I am expecting Euro to hold below 1.3590. It needs to break 1.3410-20 zones for a move towards 1.3350 levels, if Euro dips further it should find support around 1.3290 for a correction.        

GBP @ 1.6433 = GBP poses risk of correction, as its ability move beyond 1.6650-80 has immensely reduced and may even find tough to crack 1.6580 zones. However, downside break of 1.6320 is required for fall extending towards 1.6220-50 zones. Meanwhile, initially buying interest on dip could be seen before BOE rate decision, which is likely to fizzle out soon after.

JPY @ 101.96 = Yen move will largely depend on emerging market factors, which should be watched carefully. Levels to watch is 101.40, break would see push towards 100.80-90, which should hold or else 100 Yen will be challenged. However, support 101.20-40 may hold for up move. Break of 102.80 will encourage for test of 103.20-50 zones.

AUD @ 0.8750 = Important week as RBA will take policy decision that should remain unchanged. Downside pressure will remain intact as long as 0.8880-90 zones holds. Break of 0.8690 will see losses extending towards 0.8650-60 failure to hold risks 0.8620. However, prior to dip Aussie could make upside correction before easing.   

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.