It was quite an eventful week, as financial market kept on guessing about Fed’s easing policy and its future policy stance. Initially it was thought that Fed Chairman is hinting for continuation of its easing policy for longer period and therefore, QE3 looked unavoidable.
But outcome of FOMC minutes was a big surprise for the market, as it had different story to tell about FED’s March gathering, as the tone was clearly hawkish. Out of 12-member, only 2-members was in favor of quantitative easing.
More importantly, report indicated that Fed is not too worried about inflation getting out of hands. Feds 12-member committee were not specific to maintaining easy monetary policy until 2014, as thought earlier and are willing to make changes if necessary. They felt that there was no need to ease unless economy deteriorates.
After the release of Tuesday’s FOMC minute’s market reacted sharply, Stock market fell, Gold plunged, Currencies fell and US Dollar gained. US treasury yields rose sharply.
But market was disappointed after Friday’s nonfarm payroll data as 120.000 new jobs were created after averaging 212.000 per month for last 3-months.
I do not think that this is a bad number because one of the factors described for less job opportunity is due to warm weather condition, which saw fewer layoffs and hence, fewer hiring took place in the month of March.
US Economic data’s released so far during the week supported Fed’s viewpoint that US economy is performing well, as most of the industries are in hiring mode, which means manufacturing and production sector is doing well. Graph of US government hiring is up after losing 265.000 jobs in 2011. Therefore, overall employment trend is still encouraging.
However, all economic data related to growth and job for the coming two and a half months will be keenly watched by the market watches to determine the trend, as the next big coming event is “Operation Twist” due in end June. Next FOMC meeting is due on April 24-25 is expected to be more challenging.
The point that I am trying to make is that the language of minutes suggest that if FOMC members are less worried about inflation and are willing to make changes earlier if necessary it could also mean end of “Operation Twist” to counter inflation.
Meanwhile, Europe financial market is once again under stress, this time it was Spanish bond auction that made market nervous and jittery, as its bond auction failed to attract buyers fearing sovereign debt crisis is not over as yet.
Despite 23.6 pct unemployment, Spain has huge task of implementing promised austerity measure by imposing more taxes and slashing of spending to reduce deficit.
European worries saw Spain’s 10-year bond yields surged that weakened Euro, Credit Default Swap (CDS) surged and world stock market slipped.
During the week market will be focusing on developments in Europe, as there are no major economic data’s to be released from Europe or USA.
But this week market will be keenly looking for release of two-important Chinese data’s. On Monday China will announce its CPI (YoY) expected to rise to 3.3 pct against 3.2 pct and on Friday GDP (YoY), which is expected to grow by 8.3 pct against 8.9 pct. Soft data will strengthen the case of Chinese monetary easing that could give small boost to global economy in hope of increase in economic activity, it will also help gold price to rise in a hope that easing condition will encourage investment towards the yellow metal.
GOLD @ $ 1630.20 : This week gold watchers will be focusing on two major events, release of Chinese data that will provide further clues about easing policy and outcome of talks between Indian bullion traders and jewelers. Both are very crucial to determine gold’s near-term trend. US job data showing less job creation in March is a glimmer of hope that FED could still consider QE3.
My immediate gut feeling is that on Monday morning we could see gold surging towards $ 1645-50 and buying at low levels could be beneficial. This week investors tone is bias for gold, which is on the upside. But as gold will gain strength, risk for fall will increase for fall.
Two possible factors could depress gold buyers and may see selling interest on price rises. I expect China to delay its easing policy because Chinese Central Bank may prefer to wait since its growth is still too high against its projected target of 7.5 pct.
Secondly, Indian economy cannot afford to fund the rising demand for gold that has risen to over USD 50 billion annually, which is around 25 pct of its exports or 92 pct of India’s home remittances that it receives annually. Rising demand for gold or rising gold prices, both are big threat to the Indian economy as India produces on 2 tons of gold and demand by next year could jump to 1.000 tons.
It is faced with huge deficit problem that is being watched by the rating agencies, which is a big threat to the country’s rating. Rising oil prices are tilting its balance of payment position that is putting excessive pressure on exchange rate, as India annually buy oil worth USD 135 billion based on current market price.
Economically to maintain current pace of gold buying is certainly not feasible for a nation where gold is symbol of power, wealth and prestige for owner that has the possession of yellow metal. Neither refusal to withdraw fully or partly of excise duty will reduce demand for India’s gold, as in present circumstances, Indian government is hardly left with any easy option and hence, may not opt for soft approach towards Indian bullion traders or jewelers demand to roll back excise duty on gold. Bottom line is that Indian would continue to buy gold weather duty is withdrawn or imposed.
Investors/traders demand for gold should allow clean break of $ 1640 for $ 1652. However, gold will find resistance around $ 1666. Break of this resistance level could see a test $ 1675. Major support lies at $ 1614.
It is important to pick and trade on Support and Resistance level, as I am expecting both ways big swing. Range for the week $ 1625 - $ 1675
EURO @ 1.3095 = I have bearish view and this week I would prefer to pick the top to sell Euro. 1st resistance is at 1.3140. A break here would see a test of 1.3180. However both are good selling levels, as looking for down side break of 1.3010 that would encourage for a test of 1.2950, but needs to dip below 1.2920 for 1.2840, or else 1.3240. Range for the week 1.2840- 1.3240
GBP @ 1.5869 = Initially bias is on the downside and Cable is likely to fall towards 1.5750-75 zones. However, GBP is unlikely to fall below 1.5690 as demand should emerge on dips. On the upside, break of 1.5895 would risk for 1.5923-30, but Pound has strong resistance at 1.5950. Ranges for the week 1.5720- 1.5950
YEN @ 81.63 = If you have been following my weekly blog, as per my call Yen made a perfect break of 82.20 to continue its gain test 81.70 before making a recovery to test the highs 82.95. There is strong correlation between US Treasury yields and USD/Yen pair. With US treasury yield gaining Yen strengthens.
I think US yield gain after the payroll is bit overdone and therefore, we could see slight easing of US 10-year bond yield, which means Yen will also weaken. Keep an eye on 10-years USD bond yield currently at 2.06 pct from last week’s low of 2.42 pct should ease that will help Yen to push beyond 82.50 for re-test of 833.50. US 10-year yield below 2 pct could send roaring to break 81.20 for 80.50, which not a favored scenario. Range for the week 81.20 – 83.80
CHF @ 0.9166 = In my last week’s note I did warn that SNB’s patience will be tested and so did the market as SNB’s Chf/Euro floor of 1.20 was briefly tested. Basically it happened due to market concerned with the health of Spain’s economy that weakened Euro and CHF lovers tested SNB’s nerve by hitting 1.1992. SNB stepped in to intervene. Market will surely test the seriousness of Swiss National Bank’s resolve. I will not be surprised to a test of 1.1980, but market should be alert on its toes as SNB will definitely come up with strategy.
Swiss Franc buying around 0.9125 would be a risky proposition, though market may not hesitate to test the 0.9095. I am expecting a correction a possible push beyond 0.9250 for 0.9350 cannot be ruled out. Range for the week 0.9075 – 0.9350.
EurO –GbP & GoLD - BiaS on UpsidE ApR 2-6