Financial market sensing new funding problem

Financial market has been sensing new funding problem that could arise from commercial paper market (unsecured short-term debt), as US is seen reducing exposure to non-US banks. Major Key short-term maturities is due from September 2011.
Funding worries thrashed European banks as US regulators have been interrogating the genuineness of European banks' liquidity demand. Large numbers of European banks are dependent on US funding to meet their money market requirements. Earlier, Swedish regulator rang the alarm bell by warning the banks to prepare for possible funding crisis.
It was another turbulent week, with bloodbath spilled all over the global financial market. Last week, US10-Year Treasury bond yield fell to record all time low of 1.973 percent before recovering to close at 2.06 percent. Record fall of the Bond yield is clearly pointed towards recession, and deflation, in the USA in the coming months.
Chinese/Biden statement, showing confidence in US economy would be tested soon as market would be watching China's seriousness in its future US bond purchase. Currently, China's holding of US Treasuries has fallen to $1.166 trillion against its October 2010 holdings of $1.175 trillion, and then the 10-year bond yield was 2.63 percent versus the current 2.06 percent. Fed website showed that total amount of US Treasuries sold was $4.499 trillion.
Since October 2010, despite fall in Chinese investment in the US Treasuries, 10-year yield fell by 57 basis points--from 2.63 percent to 2.06 percent. So, in my view, despite Biden's assurances, I doubt that the Chinese would invest in US Treasuries, aggressively. They would rather wait to see market reaction: if the US goes for 3rd Quantitative easing (QE) and if QE3 happens, it would ultimately pull down 10-year yield by another 50-60 basis points due to fewer investment opportunities, as other markets are illiquid. FED also has another option up its sleeve to delay 3rd QE and offer long dated treasuries, as the gap between the two-yield curve suggests that there is enough room to buy more time.
With US Treasuries yield at current levels, I see one huge risk that if the yield bounces back, yield calculations suggest that if 10-year yield makes an upward move of 100 basis points, bond holders would have a negative return of 13.75 percent. Investors are surely making calculations, which mean if yield dips, gold, silver, oil, food, Swiss franc, yen and all those currencies which offer higher interest rates have enough potential to make a bull-run.
Gold celebrated its 40th anniversary with a big bang. After the end of gold standard in 1971, gold has continued its upward journey, in which debasing of US dollar was also a helping factor. During this period, gold prices surged from $35 per oz to $1852 per oz. In the last 10 years, gold price has gone up by $1400 per oz, which means a compounded annual growth of 20 percent. There are many factors helping gold surge--quantitative easing, low interest rates, low growth, debt crisis, currency volatility or bumpy stock market. But I blame global central banks as the main culprit behind gold's recent move, as they are the regular buyers of the yellow metal in sizable quantity, since 2008 financial crisis.
The problem that I am sensing right now is that gold's one-sided move is very alarming, unless it makes a correction. Global economic uncertainty, central bank buying, and fewer investment opportunities are certainly big factors helping gold, but the more worrisome factor is that the market is constantly losing faith in paper currency, such as euro and US dollar. The secret behind the strength of fiat or paper money is largely based on the country's political certainty, strong central bank regulation, and stable economic condition. History suggests that any country that does not meet the standard, its currency struggles to survive, and loses its value.
Though I remain bullish for gold, and my target for the calendar year of $2200 remains valid, what I fear is that the dynamics of every product/trade/factors are different and vary from each other. Hence, one good reason could deflate the gold bubble: it could either be due to higher margin call or central banks' absence from the market for further gold purchase, or due to Venezuela decision to repatriate its overseas gold reserves held in UK, which has $11 billion gold holding. Or, it could be due the funding problem arising from unsecured short-term debt, also known as 'commercial paper'. So, new entries should be aware of the risk factor and wait for the correction to happen, which would be the appropriate time to enter for trading purpose, as correction of $150-$200 is always a possibility. But this would only be a technical correction, as larger corrective move should be of $400-500 that may occur some time in the later months.
Meanwhile, in the currency market, choppy trading would continue to dominate, based on information/news released from both sides of the Atlantic. The impact of European market exerted pressure on euro that fell and tested crucial chart point of 1.4270, but survived. Two factors are probably supporting euro, as dealers believe that China is buying euro, on a dip, that helps euro's quick bounce-back. Another factor that helps euro to make gains is SNB intervention through EURO/SFR, as SNB is keeping a constant watch on Swiss franc and intervening at intervals, and not allowing buyers of SFR to dominate over its currency.
For the last 2 days, pound sterling has made a strong comeback on MPS report that all 9 of its members supported to hold its rate. BoE's priority is growth, and it does not want to choke recovery by hiking rates though inflation at 4.4 percent is at extraordinarily high level. This has provided support to GBP in crosses and against USD, as market players risk intervention from SNB & BoJ and is not aggressively buying Swiss franc and yen. But one thing is sure that investors would continue to target two currencies and test the nerves of both central banks.
EURO - 1.4392. Currency market could witness another wobbly week, which could be led by many factors. The market will be watching the global equity market, European debt crisis, US treasuries yield and European bond buying. Therefore, traders should avoid entering the middle of range and, instead, suggest entering at the baseline area on or near breakout points. Euro could surge towards 1.4520 and a breakout would encourage for 1.4620, if seen should top out. Therefore, buying of euro could come around 1.4350, and only break of 1.4220 threatens for 1.4150. Range 1.4150 - 1.4620.
GBP - 1.6465. Any dollar weakness would encourage Cable buying. Prefer buying on dips instead of jumping in the middle of the range. Preferred buying area is 1.6350 and should stay above 1.6220. A break of 1.6550 would encourage for 1.6640. Sell sterling above 1.6720. Or, else 1.6150. Range 1.6150-1.6680.
YEN - 76.53. Too tricky and testing time for BoJ, as Japanese economy is already suffering due to the March earthquake, now is hit by global slowdown. I think BoJ is keenly watching SNB and may pick a few tips. But could soon lose patience and rest new low: 75.20-50 is the crucial area to watch; absence of BOJ would encourage dollar bulls to attack. However, do not suggest jumping in this rally, as looking for a break of 77.45 to test and break 78.30 for 79.50. If seen would be good opportunity to buy YEN. Or else 73.20 before up again. Ranges 73.20-79.50.
SFR - 0.7851. SNB will not give up, as it has plenty of reserves to intervene. Only break of 76.45 would risk for another 100 pips drop. Waiting for a break of 0.8080 for a push towards 0.8280, as my SFR target is 0.8470.
GOLD - $1851.40. Gold met my August 5 target of $1840 comfortably. Now I am looking for some consolidation before attacking my next target of $1940. It has support at $1830, with crucial at $1780. However requires clearing $1890 before next bullish move occurs.