Excessive volatility was witnessed during the week caused by two major events. One was German court ruling that went in favor of European Stability Mechanism (ESM), which was the biggest obstacle for the Euro-zone leaders struggling to sort out the Euro-zone crisis, as without favorable ruling they was unable to release the bailout funds.
ESM one of the essential tools to fight the regions crisis was suppose to become operational in the first week of July that contributes 27 pct or USD 245 billion of funds. However, the key point inserted in the court ruling is that German government has to get Bundestag endorsement or parliament’s approval for all matters pertaining to ESM or any other Euro-project, which also means that there is capping of up to USD 245 billion for, which Merkel’s government has already obtained approval.
Second major event of the week was FED’s decision to buy more bonds by providing third round of quantitative easing (QE3) confirms that the US economy is still struggling hard to recover and therefore, asset bubble price or commodity price hike is a secondary and unimportant issue. Another round of QE is surely pleasing news for borrowers and speculators at the cost of savers and government money, but this also means increase in risk. FED Committing to stretch the zero interest rate policy period until 2015 is quite depressing news for the savers that will have to pay the price for borrower’s financial adventurism because official inflation have been hovering around 2 pct since almost a year and it is likely pick-up with the passage of time, as global commodity prices have been rising sharply, so poor savers will continue to suffer as they will be getting negative return.
FED was able to dodge the market by making a tricky announcement by not providing the total amount of QE3 money that they will provide to purchase mortgage back securities, instead they announced to buy USD 40 billion monthly until the US labor market improves sufficiently. This amount can soar up to USD 600 billion instead of USD 500 earlier estimated.
Unfortunately, at the cost of poor economic management by the global financial leaders/managers the rich and the elite of global business community, instead of contributing through tax increase and committing to provide better growth related environment, they continues to enjoy cheap money made available to them and are having some of the best times. Neither German court ruling inserted any such clause to ensure that its tax payer’s money will be protected and will not be thrown in the pit, nor FED has ever provided or being seriously questioned about providing evidence that the purpose it is printing of money is for new business openings to help in increasing in revenue collection and to increase US exports that would ultimately help the economy to create more new jobs.
If we keep track of spending data of last 5-year, it is the banks, financial institutions, stock markets, gold, oil and crop producers that are blessed with the huge sum of easy and cheap money and are having best of times benefiting most. Whereas, the economies/businesses that were supposed to get funding in trillions are still in deeper trouble because the real money does not reach them due to flawed policy and yet governments of major economies struggling for funding is still enjoying high ratings by the ratings agencies instead of placing those economies in junk category, as they need more unknown amount of funds for its survival.
But what is more interesting is that despite all indicators pointing to higher prices, inflation in all the major debt ridden global economies is at extremely low level. Euro-zone leaders want a free hand for free funding at a very low borrowing cost though not sure that how much and until when they will be required to print notes. They have failed to provide a plan that how they will return the borrowed money.
It has now become obvious that inflation is artificially kept low to support easing policy and zero interest rate policy. If the government seriously wants well being of people and wants businesses to flourish they are simply required to make a coordinated effort, by opening their oil reserves, flood market with their food holdings kept in reserves, announce selling of their gold holdings and declare that Global Central Banks will charge on deposits and most importantly reduce sale of government securities.
Such decision may bit big business enterprises, but money will start flowing towards genuine businesses. Banks will be forced to lend to old and new businesses, which may ultimately lead to economic revival.
Overall market could be sensing some sort of stability after the two major events. German court ruling in favor of ESM will provide more space to the Europeans though Spain still remains a big worrisome factor and news of its bailout will once again create volatility. Apparently it seems that FED's open ended QE3 policy announcement will provide relief to financial market, but dividing the period to monthly basis could be used as another effective tool in the hand FED that could spring surprise trough its FOMC meeting and FED official speeches. Hence, major focus should now shift towards all economic news/data’s. Despite all the happenings medium to long term stability cannot be guaranteed as any negative news can bring spark in the financial market.
GOLD @ $ 1769.70 = The expected upward rally continued before stabilizing around $ 1770 level. We could see some more gains, but risk of profit taking will remain a threat. Buying interest on dip will be seen as break $ 1755-60 zones will open gates for a possible test of $ 1740-45 area strong support area. On the up, break of $ 1785-88 levels risk for possible test of $ 1798-04 zones.
EURO @ 1.3127 = In last couple of month Euro surged by over 1000 pips, which is very unusual. History reminds us that correction does often take place, so any one reason could be good excuse to clobber the European currency. This week challenge will be break of 1.3190 levels that will for a test of 1.3250-60 zones, if breaks test of 1.3310-20 will then be possible. However, real test on the downside will be at 1.2870 on break of 1.2950, which could challenge Euro to show it muscles. Range for the week 1.2850 – 1.3320
GBP @ 1.6212 = Cable will remain traders favorite currency, as traders are always keen to buy in dips. It has resistance around 1.6280 and break could British currency towards 1.6250 zones. Therefore buying interest is expected around 1.6150 and long as 1.6070 is protected GBP will bought on dips. But caution is required if Pound Sterling is unable to hold 1.5970 level. Range for the week 1.5970 – 1.6380
JPY @ 78.28 = Saw fine dip but as mention in my last week’s note that resistance will be found around 77.20-40 zones. Yen eased off after hitting the given level and nor required to move beyond 78.80 or else we could see another attempt towards 77.20. Ranges for the week 77.20- 79.20
CHF @ 0.9267 = Though weak against Euro fearing upward adjustments of peg, nervousness will prevail due to threat on SNB intervention. Next resistance levels for the Swiss currency are at 0.9180 and only break here risk for a test of 0.9140-50 zones. However, break of 0.9380 will see more easing of Swiss currency towards 0.9450. Range for the week 0.9150 – 0.9480
AUD @ 1.0548 = AUD against all odds may do well if it breaks 1.0630-50 zones that push Australian Dollar towards 1.0710. However, keep a close watch at 1.0480. Break could see losses extending towards 1.0410-20 zones. Range for the week 1.0380 – 1.0720.