ECB rate cut and BOE's liquidity injection on same day should not be a big surprise, as both were due for its monetary policy announcement. But the biggest surprise of the day came when Peoples Bank of China (POBC) announced cutting its rate 31 basis points (bps) to 6 percent, slashing its 1-year deposit rate by 25 bps to 3 percent and lowered the floor for lending rate to 70 percent of benchmark rate from 80 percent.
All three announcements were minutes away from each other strengthening market belief that this is a co-ordinated effort. There is surly some sort of urgency, as China has earlier slashed its rate on June 7, hardly a month ago. Economic data of recent months shows that Chinese economy is on constant decline and a quick move suggest that more economic slide could be in the pipeline, as China could making extra effort to halt its manufacturing slump.
Due to reduction in cost of funds, this easing will be advantageous to the state enterprise that carries huge debt burden, it will get some relief, mortgage borrowers will surly benefit from the outcome and the local municipalities will also enjoy the relief. If the money does not flow into new business corporate profit will drop, but jobs' situation may not deteriorate for some more time.
Similarly, Europe with unresolved debt issue and faced with recession and fear of deflation that has pushed unemployment rate to historically highest level in the eurozone region gave room enough to ECB to cut its rate to 0.75 percent from 1 percent.
In a more surprising move to stimulate economy, anticipating fund to divert towards much touted growth ECB slashed deposit rate to Zero from 0.25 percent. But, when there are fewer jobs, no credit new lines availability due to contraction of corporate balance sheet that reduces the chances of business expansion, non-performing loans on the constant rise and less spending due to empty or thin wallet. How will the economic activity revive?
Recent Purchasing Managers Index (PMI) clearly indicated showdown in manufacturing and construction sector indicating that the British economy could further contract that could lower GDP growth. BOE that opted to maintain its lending rate to 0.5 percent extended its quantitative easing programme by adding another Pound 50 billion asset purchase to increase the amount to Pound 375 billion through its bond purchase programme, since its economy could not expand. UK is desperately trying to boost its export that has slowed and wants its housing market to flourish that could create jobs.
Meanwhile, US job data, last before August FED FOMC gathering to decide its next policy direction was disappointing and added 80,000 jobs in June against projected 100,000 jobs, but may be as bad that will force FED to go for early QE3.
I think gradually from now onwards US economic data will start picking up, as we may have seen the worst. Mild recovery will provide sigh of relief to the FED official as they may not be comfortable taking any drastic measure prior to November US election.
Looking at the most recent global developments such as gathering of G-8 leaders, European leaders gathering in Brussels and so-called co-ordinated global interest rate cut decisions by the major economies, market trend suggest that nothing is working as per the wishes of governments, financial regulators, policy makers and so-called think tanks. Therefore, threat of financial disaster still looms.
GOLD @ $1583.50 = The move was perfect in line of my call hitting the top around $1,622 before exhausting to hit the downside given target of mid '70s. Now, gold is again nearing a crucial level, but may not have the potential to penetrate below $1,545 and may find stiff support around $1,550-60. Suspect clear break above $1,596 risk for a test of important resistance at $1,610 break here could challenge $1,625 and push beyond could risk for $1,648.
EURO @ 1.2285 = The dip below is sharper than expectation, as euro was unable to recover after falling below the major support level of 1.2480. This down move could continue if euro is unable to move beyond 1.2360 for test of major resistance at 1.2480. Break below 1.2180 risk for a test of 1.2050. Ranges for the week 1.2050 - 1.2480
GBP @ 1.5486 = Cable did hit 1.5720, but as per my last week's post that 1.5740 will be difficult to crack, GBP fell sharply to hit the downside target of 1.5570, but extended its loss by another 100 pips. On the downside 1st major support is at 1.5440 only break risk for test of 1.5370. However, bias will remain on the upside, which means preferred trading strategy would be to pick Cable at support levels that will provide profit opportunity. Break of 1.5570 is required for a test of 1.5680. Ranges for the week 1.5350 - 1.5720
JPY @ 79.66 = Last week I said Yen has resistance 79.20, bounced back from the given level, I also said that break of 80.10 is required for more Yen losses, it recovered from 80.08 to trade in narrow range. This week again views remain unchanged and looking for a break of 81.10 for 80.80. Ranges for the week 78.80 - 81.20
CHF @ 0.9772 = Since, I expect Swiss Franc to trade in line with euro, which is closed to 1.20 parity. SFR could not get breathing space and has to follow in line with euro to weaken sharply, similar trend will be witnessed. Swiss currency needs gain beyond 0.9705 for 0.9620 or else break of 0.9855 risks for 0.9975. Ranges for the week 0.9620 - 0.9995
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