On Friday, as soon as Fed Chairman Ben Bernanke took the podium, Euro, Gold, Oil, Stocks and US 10-year Treasury prices surged in the hope of QE3, as he made a case that non-traditional tool such as historically low interest rates made the difference, which helped the US to escape from a longer period of recession and helped its economy to recover create more jobs.
The Fed has kept rates between Zero pct and 0.25 pct since 2008 that has so far created excess bank reserve of USD 1.5 trillion through its sale of asset purchase. Quantitative easing is bad for USD as liquidity injection weakens the currency.
In a much awaited monetary policy speech, Bernanke, defending his earlier two QE decisions and his asset purchase plan, added fuel to the fire when he said that QE3 is necessary, but the key question is that why is everyone missing the point that he did not promise QE3 in immediate future (FOMC meeting on September 12 - 13).
Bernanke insisted the urgency of fiscal measures referring to ''Fiscal cliff''. This time Fed Chairman''s tilt is surely more towards easing, as he looked more concerned about growth the jobs. But in my view QE3 is certainly was not a definitive one. Basically, the Fed Chairman tried to maintain a balance when he quoted that the economy is not in awful shape, which negates his earlier statement that QE3 is necessary.
My conclusion to his speech is that we may not see any quantitative easing coming on September 13 FOMC gathering, as Republican Presidential candidate Romney has already hinted that if he gets elected he will ask Bernanke to leave Fed and hence, choice of timing may not be appropriate as QE3 could be interpreted as having soft corner for Obama. Therefore, he may have hinted that Fed could be well prepared to make the move, which may be announced in December if the economy does not pick up and continues to grow at current pace. But, US economic data specially related jobs and growth until December FOMC will provide better picture of the economy and could be the deciding factor that if another easing is necessary.
As we are approaching Fed''s FOMC meeting, which is due next week for its policy decision, Europe is not a forgotten chapter and this going to be important week since ECB President Mario Draghi will make two major appearances. Market is expecting that ECB president will provide more guidance about European bond sales programme and how European Central Bank plans to cap the borrowing cost. If Draghi is unable to provide details about his bond buying plan, this could dampen market sentiment and we could see sharp correction and volatile global market before two major coming events in the next two-week ie, German courts constitutional decision on September 13.
After watching Mario and his five-member team opting to quit Jackson Hole Symposium, my gut feeling tells me that Mario will not announce anything specific about his euro-bond buying plan and would rather wait for the German court decision, which will initially disappoint the market that will give market excuse for correction. But Mario has shown the ability that with his duel language he may keep the market guessing about his coming European bond strategy.
GOLD @ $1691.40 = On Friday, gold surged over $40 on strong believe that Fed is going for third round of easing. Interestingly since quite some time there is lot of talk going on about the possibility of Fed easing and during period gold buying from India fell sharply and demand fell to half of its last years purchase. There was some Central Bank buying, but China, a leading gold buyer, is suffering from slowdown, which is not supportive for the yellow metal. Despite all the facts gold since May 2012, gained $150 and rose from $1,540 to $1,690. I am just wondering is this some sort of trap or a genuine Bull run or an attempt by buyer to lift the price sitting since almost a year with loss.
EURO @ 1.2576 = Euro could find stiff resistance around 1.267 zones and requires to push beyond for a test of 1.275. However, market will remain choppy with possibility of big moves both way and a dip below 1.251 would force European currency for more losses that see a dip and test of 1.242. Range for the week 1.242 - 1.278
GBP @ 1.5864 = Cable could shine this and gain against crosses. It has strong support around 1.575 and a push beyond 1.595 should encourage for more gains and will not be surprised to see a test of 1.6020-50 zones. Range for the week 1.572 - 1.608
JPY @ 78.37 = Yen gained after failing to fall below key support currency 78.95. Japanese currency has the tendency to move in line with US 10-years treasury. 78.95 remains crucial support level for the Japanese currency only break would see a test of 79.15, which is not a favoured move as fall below 78.1 may encourage for 77.70-80 zones. Ranges for the week 77.7- 79.2
CHF @ 0.9548 = Swiss currency has strong resistance around 0.948 only break could see a test of 0.942. But Swiss Franc may see some correction and may ease to test 0.9605 break risk for sharper fall to test 0.967. Range for the week 0.942 - 0.968.
AUD @ 1.0323 = If USD further weakens Australian currency may not enjoy the Bull Run. It has strong resistance around 1.0390-00 zones and only break here would push AUD towards 1.045. I see risk for more losses, a drop below 1.025 would encourage for a test of 1.021. Range for the week 1.018 - 1.045.