European worries continue to dominate the market despite approval of Spanish bailout package by the Euro-group granting financial assistance for recapitalization of financial institutions, which is largely based on policy condition to focus financial sector.
The risk is that despite reaching an agreement to fund Euro 100 billion from temporary rescue fund to recapitalize its bank that will later be shifted to the European Stability Mechanism (ESM) book, which still requires German law maker’s (Bundestag) approval.
The big fear is that Spain may not be able to manage its debt problem that requires structural reforms to correct its macroeconomic imbalances, which is likely to be closely monitored. Spain has already announced lowering of its GDP that will fall to 0.5 pct in 2013 from earlier estimates of 0.2 pct growth. Hence, despite huge funding/austerity measures the economy may contract, as it will be under a check that would widen the deficit.
The uncomfortable global market condition surely indicates that there is some sort of uncertainty looming, pushing European currency sharply down to 25-month low, keeping global stock market under pressure and pushing 10-years Spanish bond yield to above physiological level of 7 pct. Demand for US treasuries is on constant rise. Yen, GBP, AUD and Nordic currency is in good demand, all indicating nervous market condition.
Meanwhile, last week FED Chairman Bernanke faced with difficult questions in his congress appearance and was asked to explain about the benefit of continuation of FED’s low interest rate and easing policy that has deprived savers of interest earnings and why his policies is unable to produce more jobs, which was a tough ask. He accepted that the economy has not picked up to the desired level and more effort is required, but his focus was on fiscal support. This will surely refrain FED from easing next week as it has its political consequences.
This week, market will continue to keep a track on news flashes from Europe and the release of economic data’s for direction. On Monday, strong Australian PPI data will help RBA on maintaining its view on interest rate. Later in European session UK Nationwide Housing Prices number will indicate housing growth.
On Tuesday, Germany and Euro-zone’s Purchasing Managers Index will paint clearer picture of economy, but Torika’s (IMF, EU and ECB) visit to Greece should not be ignored. Finally US economic data in the last session will be keenly watched.
Wednesday is going to be a busy days, as RBA will announce CPI, European IFO will indicate the business climate in the region and UK will release its Q2 GDP and at the US opening out of 4-data’s New Home Sales is key is expected to rise that will provide hint about growth in economy, as sale also creates demand for goods and increases spending.
On Thursday, German Consumer Confidence Survey data will indicate economic activity, as higher number is considered positive, but market will wait for release of barrage of data from USA that includes Durable goods order and initial jobless claims that will help FED to determine the pace of economy.
All eyes will be on the economic data’s to be released on Friday, as Europe will release its main inflation indicator CPI and lastly until US GDP Annualized (Q2) announcement market will remain nervous, which could be further revised downward from expected 1.5 pct, that was revised down from earlier 1.9 pct. Unchanged or surprise upward revision would help in closing Q3 or further easing debate for the time being.
Last Week - Monday July 16-20
GOLD @ $ 1588.70 = Gold moved in line of my weekly forecast making sharp recover after dipping down and finding good support around $ 1550, but found resistance at $ 1596.
Late week optimism is due to fall in Chinese GDP number to 7.6 pct vest last quarter’s 8.1 pct strengthening believe that despite 2-cuts in a month, China will further ease its policy to halt the slide.
Ongoing global easing is also helping the yellow metal as Korea, Brazil and UK eased to stimulate its economy. There many those still believe in US easing in its August policy announcement, but keep in mind that FED minutes clearly stated that it does not favor easing. ECB easing is one big factor that also helps gold for carry trade opportunity versus EURO because of currency’s liquidity factor. Initially bias could be on the upside until Bernanke’s Wednesday testimony. But gold will find regular sellers above $ 1600 because the yellow metal itself is not too appealing due to high price and is a dead asset that does not offer return. It has strong barrier around $ 1604, break is required for a q move toward $ 1620-25 zones. However, I am expecting that market will pick the top and break $ 1578 will encourage for test of $ 1528.
EURO @ 1.2248 = The down move did continue but could not break below 1.2170-80 zones convincingly to survive further fall. If Euro fails to move beyond 1.2295 there is a risk for further down move to test 1.2150 a crucial level. If downside break occurs we may get closer to 1.20. However, upside break will encourage for a test 0f 1.2360. My preferred strategy will remain unchanged to pick the top and sell European currency. Ranges for the week 1.2010 - 1.2420
GBP @ 1.5574 = Cable made a late recovery and bias this week remain on the upside and this upside momentum should continue. Cable has strong support around 1.55 zones could penetrate beyond 1.5670 for 1.5770-90 before exhausting. Only break below 1.5450 could risk for more losses. Ranges for the week 1.5570 – 1.5795
JPY @ 79.17 = Yen trade in a narrow band and is gradually likely to weaken to test 79.80 and only clear break could extend the fall towards 80.15-20 zones. However, Japanese currency has the tendency and could bounce back to test 78.80 to challenge 78.40-50 resistance levels Ranges for the week 78.40 – 80.50
CHF @ 0.9808 = Swiss Franc will meet resistance around 0.9750 and will have to clear for more gains towards 0.9710. Failing to make gains could risk for drop to new lows, possibility towards 0.9880. Break risk for a test of 0.9985. Ranges for the week 0.9680 – 0.9995