FX & gold - weekly outlook: German lawmakers likely to support Greek rescue deal

The next big event of the week after Greece bailout will be the ECB''s offer of its second batch of 3-year Long-Term Refinancing Operation (LTRO) money, ie loans to banks that will be credited on February 29.
In December last year, the ECB lent euro-area bonus a record amount for three years in its latest attempt to keep credit flowing to the economy during the foreign debt crisis about Euro 489 billion. That ECB offer was almost free of cost - against collateral - enabling banks have access to cheap money for the medium so that they can keep lending to companies and households. In addition to the longer term loans, the ECP has widened the pool of collaterals banks can use to rescue the funds. Out of this amount, about Euro 300 billion was allocated to old loans while the remaining Euro 189 billion was a fresh money.
The release of Eurozone money supply data on Monday for the month of January will provide more clues about the success of first ECB tranche. One thing is for sure that it has brought down the borrowing cost of Spain and Italy. Stability, however modest, can be seen in the European banking system.
The second offering of February 29 is likely to release more cash money by injecting ample liquidity to make lending easier and spur market activity. The ECB has already relaxed its tough ratings stance/rule for certain asset-backed securities. It will provide a better access to small and medium-sized banks. Keeping in view the trend and utilisation of funds of first offering, this offering could be lower.
It may be true that as of now Europe is clam. The European Union leaders will be meeting on Tuesday and Friday this week to formulate policies. The financial safety net for protection will be the core issue of discussion, as leaders will be making demands for bolstering firewall for European Financial Stability Facility (EFSF) bailout and European Stability Mechanism (ESM) funds due by June/July this year.
However, discussions on Greece will also dominate talks in Brussels. Greece, already facing massive protests across the country after Greek parliament approved measures to reduce country''s public debt which form the central pillar of a rescue plan to stop the country going bust, will be required to explain the implementation of its austerity plan: How will it slash salaries and how will it plan cuts in pension and reduction in spending?
Greece is not yet out of the woods as it has a poor record in implementing budgetary reforms, which continues to pose a bigger challenge and a serious threat to stability in the region.
Financial market should also be ready for a possible rough ride. A split has emerged in the German government over whether to grant Greece a second bailout package. The market will get a big boost if Chancellor Angela Merkel is able to rally her country''s lawmakers behind the Greek deal. It will be too early to deduce that European problems are over.
It is going to be a busy week in the sense that the G-20 is meeting in Mexico, the EU leaders in Brussels and the German parliament will be discussing Greece bailout, so lesser focus will be on economic news from Europe and the US. But market will certainly concentrate on European developments and any unexpected happening or mishap in the region could create a volatility in global stock market and in foreign exchange market.
Fx & gold weekly outlook, February 27 - Mar 02
EURO @ 1.3447= The LTRO announcement this week will keep the sentiment for Euro bullish that will initially give a boost to the European currency. But German parliament meeting and EU leaders gathering in Brussels may create a volatility, which means market should avoid relying on a one-sided move. Another factor that is helping Euro gain strength is a strong crude oil prices due to this commodity''s correlation with US dollar.
Euro will find the first strong resistance around 1.3520-40 area and only a break of this barrier would encourage Euro to move towards 1.3663. While, on the downside 1.3410 is the key level to watch, a break of this support level would challenge 1.3340, if surrenders at 1.3250 a less likely probability.
GBP @ 1.5870 = Pound Sterling will have a tough time during the week. Buying on dips will be preferred. Cable has strong good around 1.5810 and only break would risk for 1.5750. But on the upside, a break of 1.5910 will encourage for a test of 1.5950. But further up cable will find strong resistance around .160
JPY @ 81.19 = Quite a few things are happening, shifting Japanese currency''s sentiment. Yen, which is often considered a safe haven currency, derives its strength from BOJ''s stance. The Japanese central bank has constantly opted for monetary easing by injecting liquidity through its asset purchase programme, which seemed to have worked very well. The pressure seemed to have increased as Japanese importers thought to have been holding Yen are now purchasing foreign currency by selling Yen.
Higher Oil prices do not support the Japanese currency as Japan meets bulk of its oil needs through imports from abroad. Higher oil prices distract its trade numbers and with Iranian tension in sight oil price will not ease unless chances of conflict are not significantly reduced, which is bad for JPY, so any correction could be a short-lived development. But one factor that we have to keep in mind is the Japanese year that ends in March. Generally, there is plenty of volatility that is noted around the Japanese yearend, as overseas companies look for better rates to repatriate funds to their head offices in Japan.
The currency may resist around 80.40 or else 79.80 is the key resistance level. A break of 81.62 could further weaken the currency to 82.50. Though charts suggest that if weakness continues, Yen could hit the lows of 83.48. I do not see occurrence of such a move as buyers could hop in. Yen has history of big moves in this period. All eyes should be on oil and developments in Iran. Any easing could see investors jumping in to take advantage of a cheap Yen.
CHF @ 0.8958 = Basing 1.2050 as midpoint EUR/CHF, any threat of intervention may not encourage major move unless Swiss central bank steps in. Hence, Swiss Franc will move in line with other currencies. CHF has strong support around 0.9080, which may not surrender easily and the currency should find buyers around 0.09040-50 for a move towards 0.8890, a break of this level may see more gains for the currency, which sees a test of 0.8820. Break of support level will encourage for 0.9150.
GOLD @ $ 1771.90 = The anticipated move did occur last week, gaining $ 65 to hit the highs of $ 1789.5 before gold eased a bit. Demand for gold will continue due to global developments. There are too many supportive factors, the biggest will be expected injection of excessive liquidity through LTRO. An easy UK stance and expectation that the US may consider another easing soon. China''s credit easing, strong bounce back of the Indian Rupee and demand for gold from other Asian buyers is all going to help the metal.
Gold has strong support around $ 1764-65 and is likely to hold. Once it clears $ 1780 convincingly, $ 1792 would be the next level to watch that may easily surrender to $ 1810. If seen gold will find a strong resistance and only a break of this level could challenge $ 1835. However, on the downside, a strong baseline support is at $ 1744.