FX & Gold - Weekly Outlook June 04 - 08: Events in Europe, weak Chinese data add to slowdown

Despite weak US economic data such as Chicago PMI, GDP and GDP deflator, Consumer confidence, pending home sales and Initial jobless claims were disappointing. Euro and global equity market remained under severe pressure due to unfavourable events in Europe and weak Chinese economic data further conforming impact of global slowdown. But Friday's surprisingly much weaker than expected job data added to the concern that US economy is struggling and cannot take anymore beating, which could add pressure on FED to go for another round of quantitative easing.
Non-Farm Payroll (NFP) plummeting for third consecutive month could only add 69.000 jobs against expectation of 150.000. April's downward revision of NFP to 77.000 from 115.000 was a further blow to the US economy, which pushed unemployment rate to 8.2 percent from 8.1 percent.
The weakening of data has raised the prospect of Fed easing, which saw sharp gold rally that gained by almost $80 from day's low of $1,544.75 to close at $1,621.10 and major currencies recovering by 100 to 170 pips against the Greenback.
Suddenly the tide has turned towards US economy overlooking the fact that Europe is having torrid time due to weak economic conditions in the eurozone. It has bigger problems than USA as America is still likely to grow at 1.9 percent, whereas, in March this year ECB revised down its growth from 0.3 percent to around 0.1 percent.
Signs of economic activity in European zone is not very encouraging as manufacturing and service sector indicates that pressure of debt crisis is spreading all over Europe that could push growth further down.
Though June 17 Greece elections is expected to provide direction about the future moves in the eurozone, but the cracks that has appeared in the Spanish banking system is more worrisome factor, as ECB is not willing to come to the rescue of Spain's banking system that has so far sucked in almost 30 percent or euro 330 billion LTRO funds and yet bank capitalisation is a big unresolved issue.
Spain's 10-year bond yield has comfortably surpassed 6.5 percent mark and is now getting closer to 7 percent. Its CDS is 588, it has unemployment of 24 percent, Spain has been constantly revising its deficit upwards and against the required eurozone target of 3 percent, the deficit is expected to be easily above 8 percent and country's depositors are fleeing away putting immense pressure on its banking sector.
The problem faced by Spain to borrow more money is because it does not have collateral to offer against fresh borrowings and window dressing is no more an easy proposition. Since Draghi has taken over as ECB President, there has been no ECB bond buying reported against troubled debt nation probably an effort to improve the credibility.
June will be an important month for the global financial market, as market will once again start looking at the developments in Europe, any uncertainty will continue to give jitters. Focus will also remain in USA as some of the important economic data will provide further clues about the economic performance to know if there is further need for fresh injection of money or Operation Twist will be enough for the economy that does not increase the size of Fed balance sheet as Quantitative Easing does. Next week's some of the important economic highlights include Monday's factory order which is expected to show a rise to 0.2 percent against previous that dropped to 1.9 percent, it measures the change in value of orders placed with the manufactures of new purchase, the report also release revision of durable goods order so keep an eye on that too. But earlier trading in Europe is likely to be thin due to holiday in UK. Tuesday will be busy days due to release of Australian current account deficit data that could surge and later it will announce its decision on interest rate. In the afternoon session, European retail sale and German factory order will provide more direction about the European economy. At US opening Institute of Supply Management (ISM) which is commonly known as PMI compiled by over 400 purchasing managers of non-manufacturing will be released. 53.5 are expected, high numbers are good for the economy low is bad and below 50 would strengthen the case of QE3.
Wednesday is another important day for the financial market, as day will start with Australian GDP data, ECB will announce its decision on interest rate and USA will inform the market about Unit Labour Cost, Productivity and Fed Beige Book.
On Thursday, all eyes will be glued to UK decision on interest rate and if another GBP 50 billion will be added through QE, which is currently GBP 325 billion.
On last day of the week Friday, data will be flashed from Japan, Australia and Europe, but US economic data of Wholesale Industry and trade balance will further set tone for the coming week.
GOLD @ $1621.10 = Rally in gold was witnessed soon after the release of extremely disappointing US Non-Farm payroll and Unemployment data, as investors/speculators are too confident of quantitative easing. Gold got further boost on rumour of ECB easing and on expectation of another GBOP 50 billion injection, which broke through a major barrier of $1,606 to test the highs of $1,625.
However, the move occurred, as was also helped by investors that were looking for reason to penetrate beyond $1,600 mark after two recent downside attempts that fizzled out around $1,530 on belief of Central Bank buying, but again this price hike may not encourage physical gold buyers due to economic slowdown in China and India.
During the week, initially we could see strong buying interest on dips around $1,610-12 zones for a break of $1,630 that could pave way for a test of $1,638-40 and clean break of this level would encourage for $1,650 with top new band around $1,675. However, a push below $1,604 may encourage for $1,595 and if this level surrenders $1,580 could be tested.
Preferred strategy would be to buy gold on dips, but this bullish tone will continue to exhaust on the rise and will meet resistance that will encourage correction, so profit taking is suggested at the resistance levels.
EURO @ 1.2434 = Last week euro fell nicely as per my call almost hitting target of 1.2280 before bouncing back. But this bounce back will be short lived, as market will soon realise that euro is faced with bigger problems than US economy is currently facing.
The euro is not gold and eurozone has much bigger problems, which is like a cancerous tumour that will continue to grow in size, but will find no cure. The surge in euro is another opportunity for the traders/investors to pick the top and start selling the European currency.
This rally can extend up to 1.2520, but anything beyond will be tempting, as I would prefer to pick the top to sell the European currency. On the upside a further break of 1.2570 is required for more gains, which I do not favour and I would continue to pick the top to sell euro. Ranges for the week 1.2580-1.2280
GBP @ 1.5361 = Pound Sterling was further clobbered despite flash of positive data's during the week after the weak Purchasing Managers Index data (PIM) that fell to 3-year low of 45.9 against expectation of 49.8.
Cable is likely to gradually gain stronger tone as it has very strong support around 1.5220-40 zones, which should not surrender and once it makes an upside clean break of 1.5470, it may test 1.5550 or else 1.5150. Range for the week 1.5580 - 1.5240.
YEN @ 78.01 = This week Yen gained more than my expectation to break below 78.20 to test 77.60 but made small late hour recovery. It has to break 79.10 for 79.80, but fall below 77.30 risks for 76.80. Range for the week 76.50- 80.40
CHF @ 0.9658 = Swiss Franc has strong resistance at 0.9570, where SFR may find the top before easing for 0.9740 or else 0.9510. Range for the week 9480-0.9750.