G-7 Finance Ministers and central bankers are meeting to discuss necessary action required to ensure resilience of both the financial market and the banking system. They are likely to provide liquidity to help growth and make effort to maintain price stability. But, evidence shows that compromise to ease European crisis is causing a lot of damage to the credibility, and causing political unrest in the region.
The risk of default by Greece, and by other indebted countries, has increased. Rumours are circulating that Greece might default, which has been denied by its official spokesman. Indicators are not very encouraging as Greek CDS (Credit Default Swap) is now pricing 94 percent chances of default. Germany is also said to have been preparing a contingency plan to support its banking system, if Greece defaults. French banks, already under review by the rating agencies due to exposure to Greece, may not escape downgrading, as there is an increased risk of downgrading of several French banks.
In another major development, one of Germany's ECB members and chief economist, Juergen Stark, considered to be hawkish for his stance, resigned in protest over his disagreement on banks' bond purchase program, probably because he does not favour putting German taxpayer's money at risk. Angela has Merkel already lost election support in her key stronghold area. Europe desperately needs fiscal integration.
Obama addressed joint session of Congress with his new proposal suggesting larger payroll tax cut, indicating short-term stimulus and long-term austerity measures by promoting $ 447 billion plan to slash 9.1 percent jobless rate. His proposal includes new spending on construction and roads, fresh disbursement for schools and hiring of teachers.
As we approach September 20, all eyes will start re-focusing on FED. It must be considering seriously about its next policy option. QE3 or 'Operation Oliver Twist'.
The moves witnessed in the foreign exchange market were, once again, as per my forecast. Last week, I warned of extreme volatility in Swiss franc and said that the following two days were very crucial because if Swiss National Bank failed to show up in the market, SFR would make substantial gain. SNB appeared with determination to defend its currency and seems that SNB has joined the global currency war debate by setting minimum exchange rate target of 1.20 per euro. SNB said that it wants "substantial and sustained" CHF weakening and will no longer tolerate stronger currency and would defend its set benchmark target by purchasing unlimited amount of other currency, as current level threatens its economy and job market. It helped EUR/CHF to ease by 11 percent and against majors, the currency immediately lost over 8 percent of its value.
Initially, it was a very confusing move for the foreign exchange market to see SNB intervening through EUR/CHF by purchasing euro, as Switzerland is not an ECB member and since Europe is laden with loads of problem, euro has its own pros and cons. But, SNB later confirmed that the decision on EUR/CHF rate of 1.20 was conveyed to ECB and they were also informed that SNB took the decision under its own responsibility.
The key question is: why did ECB allow SNB to interfere in its own currency when Europe itself has numerous unresolved problems? Now, the market is aware that SNB and ECB have reached some sort of understanding, as against selling of CHF and purchase of euro, Swiss Central Bank would buy euro-denominated German and French government bonds.
Latest SNB announcement says that its foreign exchange reserves jumped to CHF 253 billion from CHF 189 billion in July. So, for the time being, Swiss Central Bank may have enough funds to defend Swiss franc, but everyone would be keen to know that for how long SNB can use its Fx Reserves. About 2 years ago, SNB came across similar situation, but lost CHF 30 billion to defend its currency. Then CHF/$ exchange rate was 1.0820.
Furthermore, in Switzerland, option dealers are of view that SNB stance is too aggressive, as indications are that it may also be active in derivatives market, too, to make its intervention effective, and is using currency option to put a cap on its target of 1.20 per euro. Derivatives is an off-balance product that may give more ammunition to the Swiss Central Bank.
In my view, SNB is taking huge risk and big gamble by showing too much confidence in European economy by purchasing euro and then buying euro bond by believing that euro zone economies would bounce back. Buying may temporary help a European country, but what if at the time of selling Eeuro or maturity of European bonds the European economies further deteriorated?
But, for the Japanese central bank (BOJ), SNB's stance could be a new lesson and glimmer of hope as BOJ had been struggling for almost a decade against recession and has been unable to defend its currency successfully. Japan's exporters are demanding weak yen and after the earthquake and tsunami Japanese government and BOJ are struggling for growth. So, watch out, because with size of Japan's economy and its foreign exchange reserves, which are 5 times larger than Switzerland, BOJ can play havoc if it follows in the footsteps of Switzerland.
However, despite SNB buying of euro, the currency came under pressure due to dovish stance by Trichet, as both inflation and growth indicators are showing signs of slowdown. Resignation by top ECB economist from the executive board also weighed on the currency, which suggests that euro zone's problem would linger on.
Gold: Last week, the market witnessed continuation of gold rally that topped out around $1920 on investors' liquidation. Also helped by dollar's strength, it dipped down making a $120 correction, which later got boost due to weak stock market and falling bond yield to new lows. With so much of uncertainty in the global financial market and investors looking for opportunities and safe haven asset, the volatility and demand for gold will persist.
FX & Gold Weekly OutLook, September 12-16
GOLD - $ 1856.30. It was another fine week, as gold made correction of $ 120 that I called last week. Strategy remains unchanged: buy on dips as strong support is around $ 1830 area. A break of $ 1875 would encourage for $ 1909 or else $ 1770. Range for the week: $ 1810 - $ 1930.
CHF - 0.8833. Swiss franc weakness to prolong and it has a strong resistance at 0.8550. Any gain should exhaust around 0.8610, as break of 0.9150 would pave the way for 0.9550, or else 0.8420. Range for the week: 0.8610 - 0.9250.
EURO - 1.3652. Euro's fall was quite in line of my forecast, though extended. Euro to remain under pressure and 1.3880-20 should be the top of the range. The key level to watch would be 1.3360 should hold or drop could extend to 1.3170. Ranges for the week 1.3170 - 1.3940.
GBP - 1.5879. It was another successive call, as Cable did hit the bottom of my targeted range. Would wait and prefer buying on dips. If 1.5720 surrenders next support is at 1.5550, but looking for a bounce back to 1.5980. However, unless 1.6060 breaks, pound will remain under pressure. Range for the week 1.5650-1.6040.
YEN - 77.57. No change in view. Yen has resistance at 76.70, looking for a clear break of 78.50 for 80.15, or else 76.20. Range for the week 76.70 - 80.40.