It may be a very choppy week for the US Dollar Bulls, but it certainly proved to be boon for holders of Gold, European Bond, Currencies and for most of the stock market around the world. From the global financial market perspectives this week could be one of the most important week of the year, as two major decisions are due, one pertaining to ECB’s ongoing bond purchase plan that will announced by the German court on Sept 12 and other is due on the following day that if FED is going for third quantitative easing (QE3).
Last week there were two major announcements, as market waited for ECB monetary policy on its rate decision, which remained unchanged that was followed by ECB chief’s press conference, but Draghi opted to keep mum avoiding discussion on his bond purchase plan, probably waiting for the German court decision and on Friday US Department of Labor released its monthly payroll numbers, which does not include agriculture businesses disappointed traders due to drop in non-farm payroll that was against market expectation.
Since last couple of week’s market has been rallying on ECB President Mario Draghi’s verbal commitment/intervention that he has new bond buying plan, which is known as Outright Monetary Transaction (OMT) that saw Spanish 10-year bond yield hitting 5.58 pct from the highs of 7.75 pct and Italian bond yield of similar maturity fell to 5 pct.
Though Bundestag, German Parliament has already approved bailout mechanism that could be helpful but not an influencing factor, as German court’s decision due this Wednesday still poses a major risk for the European financial market if the court rules that the European Stability Mechanism (ESM) and temporary European Financial Stability Facility (EFSF) are unconstitutional. Since such a ruling could bring misery in the financial market, the courts’ softer approach would help to bring temporary stability.
However, despite positive German court’s verdict, unless political understanding is reached and ECB lending rules are eased, the key to obtain this facility is that the countries faced with debt problem will first have to ask for bailout funds that will be conditional such as deficit reduction, which certainly means spending cut that may initially lead to further slowdown that also requires quite a few structural reforms. So this is not going to be an easy ride for the bailout requesting country, as it will surely have to come across many political hurdles/compromises.
Meanwhile, two-day FED meeting on Sept 12-13 will be an important event of the week, as Friday’s weaker than expected US job numbers have increased market expectation for third round of bond buying, which will only be possible through money printing.
For Doves, drop is payroll may not be good news for the US economy and it increases the probability of QE3, but there is another argument, which makes lot of sense and good reasoning for FED to delay easing. It is because the young adults did not apply for jobs probably, as they have gone back to complete their schooling that had resulted fall in labor force. This has caused fall in unemployment rate that had dropped down to 8.1 pct from 8.3 pct because when there are fewer people applying for jobs the labor force gets squeezed as labor department count only those that had applied for jobs.
Therefore, my view on QE3 remains unchanged, as I see no reason for another funding, unless businesses are ready to expand. It makes little or no sense to go for another easing when business cannot take advantage of zero interest rate policy. Another easing could pose bigger threat to the economy, as instead it will inflate commodity prices and will invite inflation.
If the US Central Bank is really serious to stimulate economy and wants prosperity then it should think beyond and act by cutting 0.25 pct interest rate that it pays to banks on funds they deposit and instead FED should push down the rates into negative territory, which means that if a bank wants to place their deposit with FED, then the bank will have to pay charges to US Central Bank for placement of funds. If FED goes for 3rd bond purchase then I would like to question the reasoning as FED’s liquidity injection since 2008-09 has pushed bank reserves over USD 1.5 trillion, which is well above the banks reserve requirement that clearly indicates that banks are in no mood to lend their money. The purpose of quantitative easing is to bring stability, increase business activity and create new jobs.
Pushing of interest rate into negative territory is a very effective tool that was most recently applied by Denmark Central Bank in July this year and its economy is reaping positive result. Switzerland too is seriously considering negative bank deposit rates to weaken Swiss Franc. European Central Bank has already slashed its deposit rates to zero pct and I will not be surprised if magician Draghi comes up with negative deposit rate surprise.
GOLD @ $ 1735.40 – This week move in gold will largely depend on ECB and FED factor. We are likely to see choppy and volatile session with wide trading range. Technically, $ 1755 is the next level to watch, break will open gates for a test of $ 1785-95 zones. A fall below $ 1690 will confirm top seen and a drop to $ 1655. Break here would encourage to test $1620-30 zones.
EURO @ 1.2815 – Hard to predict in view of important events during this week, but choppy trading condition to prevail. Initially we could see Euro capping below 1.2920 and could exhaust around 1.2850-80 zones for a minor correction, but 1.2720 should hold for another upside attack. Only break of 1.2940 threaten for an attack toward 1.30’s. However, break below 1.2650 confirms top seen. Range for the week 1.2520 – 1.3050
GBP @ 1.6008 – Cable may find good support around 1.5880-00 levels, but I will never be comfortable around 1.61-62 zones, as UK has its own problem. For long anything above 1.62 should be good opportunity to book profit especially for deposit holders. However, fall below 1.5820 confirms top seen. Range for the week 1.5750 – 1.6280
JPY @ 78.25 – Japanese currency will continue to enjoy its safe haven status and to keep track of Japanese currency follow US 10-year treasury yield, as yield gains on hope of QE3 is likely to support Yen, but resistance is around 77.20-40 zones. On the up, break of 78.90 will encourage a move towards 79.20. Ranges for the week 77.20- 79.20
CHF @ 0.9440 – Swiss Franc weakened against Euro on fear that SNB could raise the floor from current 1.20 rising to test the highs of 1.2155. However, I do not see SNB acting, as it would rather prefer to wait for this week’s event. Swiss currency has strong support around 0.9350-70 zones and is less likely to make gains beyond this level. Break of 0.9540 could further weaken SFR that may test 0.9595. Range for the week 0.9320 – 0.9680.
AUD @ 1.0385 – Australian Dollar could make some more gains, but may struggle beyond 1.0480 and if this level surrenders top should somewhere around 1.0550. Any up move would be good opportunity to short the Australian currency for bigger drop. Break of 1.0250 will encourage for further fall towards 1.0180. Range for the week 1.0150 – 1.0580.