FX & Gold – weekly outlook May 14–18; poor data big cause of worry

ASAD RIZVI

Global economic data and uncertain political condition in Europe dominated the market. Poor economic data from all over the world is a big cause of worry as recessionary conditions are spilling all over the globe.

Europe faces a new situation as voters are opting for anti-austerity leaders, which is a very disturbing trend for the 17- nation Eurozone policymakers fearing anti-austerity sentiment could lead to widespread unrest in the financial market.

Greece making, which is making last-ditch effort to share power, could be heading for another election in June that could prove to be a very costly affair for the Eurozone region. Failure to form government certainly means a big blow to the European financial market.

German government that lost last week’s state election is paying the price of Greece bailout and Sunday’s rejection by the German voters in a key state election will deal a big blow to the ruling party as North-Rhine (NRW) is a populous state with a huge size of economy and this will set Germany’s future election trend.

In another major development derivative losses by a London-based credit trader of USD 2 billion by JP Morgan Chase that can surge by another billion dollar has once again raised the question about the real health of the banking sector, as the credibility factor of all monitoring agencies has also come under question.

Some of the questions that require attention are: Do the banks have proper and adequate risk management? Are the banks once again violating accounting rules?  In March 2012, regulators gave a clean bill of health to JPM-Chase based on Capital requirement, which is FED’s preference to prove banks’ health. So the big question that should be raised is: Is the current pattern or formula of determining the stress test result good enough to counter banks’ riskiest business?

It is worth noting that FED Chairman Ben Bernanke in his recent speeches that he delivered in the last 20 days spoke mostly about risk and urgency for banking sector reforms. It is now quite understandable why he was so concerned about the risk to banking sector.

Therefore, this week market will surely remain nervous and banking stocks of top global banks may come under pressure unless there is more clarity. Smaller banks may not be faced with a similar situation.

But overall traders’ investors’ focus will once again shift towards political and financial developments that are taking place in Europe. Global economic data will be keenly watched after last week’s disappointing economic numbers from all over the globe. 

Another area of focus will be unrest in the Spanish banking system, though Spanish government has announced a Euro 15 billion reform package to raise provision on loan portfolio, to increase the provision through huge injection of funds. Spain’s bank that sucked in huge LTRO money may require another injection of Euro 25 billion plus to buy more time.

China’s economy that until the last quarter of 2011 was growing at a healthy rate has joined the global bandwagon, as the pace of growth slowed down. China’s economic slowdown is caused by weaker European economic condition.

Therefore, effective May 18, Peoples Bank of China has decided to lower its bank reserve rate by 0.50 basis point, for third time since December 2011, to 20 percent for mostly large banks. Estimates are that a 50 basis point cut will provide roughly USD 60 billion cash money.

However, another worrying factor brewing up is the statement by the Head of Chinese Investment Corporation (CIC). According to him, Chinese Sovereign Wealth fund that has a portfolio of over USD 400 billion has decided not to buy European government debt, which is negative news for European currency and bond.

There will be the announcement of some key European data this week as market will focus on Industrial Production to gauge the inflation pressure in the Euro-zone and is expected 0.4 pct. On Tuesday, announcement of German ZEW, a key indicator will provide a clearer picture about the German economy, which is considered engine of European economy. Expected ZEW growth figure is 19. This reading is compiled from a survey by over 300 analysts. A higher number will give a boost to the confidence.  On the same day, the US will be announcing some of the major economic numbers such as CPI, Retail sales and New York Empire State Manufacturing Index, which will be keenly watched if the US economy is picking up. On Wednesday, European data will dominate the market. On Thursday, there is no major data announcement and on Friday, Germany will release its key Producer Price Index data.  

GOLD @ $1579: It turned out to be great week as gold comfortably broke $1600 to hit my target - $1585. This week Chinese Central Bank has announced lowering of its bank reserve rate by a 50 basis point that would provide around $60 billion of liquidity to its financial market. Chinese injection will not help gold buying, but gold bulls may show some optimism, which will help gold make small correction and provide opportunity to bears to short the yellow metal, as worsening European political and financial condition will encourage US Dollar buying.

It turned out to be another successful week as gold fizzled out around $1672 and could not make further gains to hit and break my projected target of $1635 to test the lows of $1626.

Although, there are talks of third quantitative easing soon, I am not willing to buy this idea as US may not be willing to risk inflation with more cash. QE3 is the only hope for gold bulls or else April-May demand for gold in India plunged, as sales fell to 35 tonnes as compared to last April’s sales of 95 tonnes.

Tax on gold remains an unresolved issue and Indian Rupee has weakened more than the tax increase and Rupee will remain under pressure due to high deficit and global economic slowdown. India is too dependent on foreign money and Chinese economy continues to struggle and looking for stability. So, I consider hope of QE3 as an opportunity to sell gold.

We could initially see a small correction and a break of $1584 may see penetration of $1590 for $1598, where gold could take a breather. But a break of $1608 should not happen, which could see an attack at $1620 level.

However, I will wait to pick the top to sell gold, which has strong support around $1570-73 zones. A break here could see a dip and a fall below $ 562 confirms a move towards $1546-50 area.  

EURO @1.2917 = Euro saw a perfect drop to hit target 1.2905, but failed to dip beyond. This week, Euro to remain under pressure, but a small correction cannot be ruled out. A break of 1.2865 is required for test of 1.2802 or else Euro could surge to test 1.2990 and a break here would encourage for 1.3080. However, on dip, failure hold support level of 1.2802 could see a sharp sell-off of Euro. Ranges for the week between 1.2665 and 1.3080.

GBP @ 1.6069 = Saw a prefect hit of my last week’s target of 1.6065. Cable has next big support around 1.5990-10 zones. If surrenders, GBP could drop another 100 pips. However, an upside break of 1.6130 would encourage for a test of 1.6190. Range for the week: 1.5910 - 1.6220. 

YEN @ 79.92 = Yen did test 79.40’s but could not penetrate beyond that level. Since much of the concentration will be focused in Europe, he Japanese currency may not be dealer’s choice of currency and is likely to remain in a tight band. Should hold at 79.20 and requires clearing at 80.20 for a test of 80.90 zones. However, only a break of 79.20 could risk for 78.70. Range: 78.50 - 81.20. 

CHF @ 0.9295 = Swiss continues to hover in a tiny band around 1.20 floor rate against Euro. A weaker Euro could see a demand for SFR that could temporarily breach the floor level. SFR has a strong support around 0.9320-30, which should hold, but a break here risk for test of 0.9380. However, Swiss currency could make more gains if 0.9260 surrenders. Range for the week: 9180 – 9380.