Last week, surprise combined statements that were followed one after another by the Euro-zone leaders and financial manager to protect European market lifted market from further fall and gave much needed boost to the financial market that helped sharp recovery of European bond market, it gave 300 pips lift to the ailing European currency.
Global stock market rallied. Oil and gold prices surged. US treasury prices dropped most in 4-months on optimism that Euro-zone debt crisis will now be well managed helping 10-year US treasury yield to rise by 11 basis point to 1.55 pct.
It all happened in a combined act initiated by ECB chief promising ECB will do whatever it takes to protect Euro and following day his was endorsed by another ECB official followed by Friday’s press release about telephonic talk/commitment made by Merkel/Hollande pledging to go to any extent to protect European currency.
Now, market will be keenly waiting to see that if this is a just talking or ECB have enough ammunition in their sleeves to act and protect the market from further fall. Thursday could be the 1st occasion when ECB President Mario Draghi faces the press after the announcement of monetary policy, he may have to give some evidence or provide substance to ensure how committed European policy makers are to defend the Euro-zone from collapse.
ECB in a desperate move have tried quite a few things such as bond buying, quantitative easing, LTRO, rate cut and now desperately trying for ESM banking license that may take some time. All earlier moves were good enough to provide temporary support that was short lived.
The biggest hurdle faced by ECB is to obtain permission for its bond purchase, which is opposed by German Central Bank (Bundesbank), but interestingly its two major vocal opponents have left German Central Bank and it yet to be seen that if this will help in German policy shift.
However, this is just the beginning of another serious defending by the European official of its currency and bonds. Previously Angela Merkel made quite a few futile attempts to defend Euro, but failed to obtain desired result, as Euro-zone has numerous problems. Last week IMF showed its concern against Spain, said it is economy is vulnerable and its outlook is difficult. Italian problem too could pop out any time and TORIKA is due to give its assessment on Greece. So market should not be very complacent.
Let’s take Japan suffering from decade of recession, which is a good example as BOJ and its government have been making desperate effort to halt strengthening of Yen but has failed to succeed despite intervention, quantitative easing and low interest rate.
Europe is a different story with many strings attached faced with contagion effect and every member countries are faced with wit different types of multi internal and external factors. Time will soon prove that words/verbal interventions are enough and European policy makers will have to deliver by action.
My experience suggest that in such a situation market always throws challenge to the authorities and I will not be surprised if Euro-zone is faced with more difficult situation because if the policy makers fails to deliver speculators and investors will waste no time to make best use to this heavenly opportunity.
Meanwhile, recent European development shifted market sentiment from US economy, as last week’s US economic data was not as bad, which should allow more time and space to FED to watch economic event in the coming months and hence, on Wednesday’s FED FOMC it may not go easing.
GOLD @ $ 1622.70 = I am still not sure about this gold rally that has surged on believe of Quantitative Easing (QE) coming, although last week’s economic number was good enough to give time to FED to think, so will the gold drop by another $ 100 if FED refrains from easing. Interestingly India’s purchase fell by 35 pct in July. China’s economy is not enjoying its best, so who is buying gold? Another possibility is that it could be carry trade investors versus Euro due to slash of European interest rate.
However, since gold closing is on the higher side, technically bad US consumer data on Tuesday could give further boost to the yellow metal, so initially bias for couple of days could be on the up. Should hold above $ 1602 and a break above $ 1635 will encourage for a test of $ 1648-50 zones. Surprise QE would certainly give enough space to test $ 1690. But break below $ 1588 will halt gold’s current surge.
EURO @ 1.2315= One thing is for sure that you cannot fight the authorities, so better join the bandwagon unless the picture is clear. We are certainly heading for a volatile week. Current strength of Euro can stretch if surpasses beyond 1.2390 levels and could challenge 1.2470-20.
However, I will be cautious on a break below 1.2210 and will be looking for 1.2140 to crack, which will confirm resumption of down move. Range for the week 1.2050 – 1.2550
GBP @ 1.5740 = UK economy is in shambles, Cable’s up move will surly fizzle out for a big drop in the days to come, though it may enjoy some more good moments as break of 1.5840 is required for last leg of its up tic, which could exhaust around 1.5970-00 zones. A fall below 1.5580 will ease of the current rally. Range for the week 1.5520 – 1.5920
JPY @ 78.46 = Yen should hold above 78.10 and break of 78.90 will encourage for a test of 79.50 or else 78.70. Range for the week 77.900 – 79.70
CHF @ 0.9745 = Swiss Franc has resistance around 0.9770, which may hold and Swiss currency could weaken further to test 0.9910, a break here would risk for a test big figure or else 0.9710. Range for the week 0.9680 – 0.9995