Prior to Federal Reserve Chairman Ben Bernanke's monetary policy speech on Friday, the market waited anxiously to hear him in a very tense moment, fearing that anything could happen in the financial market. Financial market feared that new quantitative easing was unavoidable due to persistent low growth and high unemployment.
But fears started to recede as soon as he hinted that FED would delay its decision until September 20. He said that more discussions on its monetary options were necessary. He said he was confident that FED still had a range of tools to stimulate the recovery. As he was speaking, calm prevailed in the market, which may be in belief that the delay in announcement could mean that things were not as bad as thought earlier.
Bernanke's Jackson Hole speech helped the markets to recover, as it became apparent that Fed's decision to delay was a signal that there was no immediate threat to the US economy.
In my view, the added problem, faced by the US economy, is caused by two previous expansionary quantitative easing policies that is proving to be fatal to the economy, as the money spent was not productive in terms of real economic growth. Neither FED's policy of new asset purchase did the trick. It has been ineffective because it was only a temporary stopgap arrangement, which could not produce the desired result, whereas inflation expectation has risen and is higher, caused by FED's constant easing policy.
The other possibility could be that FED may have decided to buy time to access the market, as I had already mentioned in my last week's analysis that September is a crucial month, since major short-term maturities of commercial paper fall from September onwards. This could be one major factor that FED opted to delay its announcement, until next month.
This is an unending economic turbulence, which may linger on for an extended period of time, as the US economy requires constant annual growth of over 5 percent for a longer duration, with combination helping factors from revenue increase and spending cut to move in the right direction. Recent political conflict in the USA suggests that the key to attain success to move ahead is the political harmony between the two-Obama administration and the Congress--and they are required to act together.
From global market perspective, after two major events, S&P downgrading and Bernanke's speech, market attention will once again divert towards economic data. During this period, a mild shift will be seen in market behaviour, as investors/speculators will start concentrating on Europe.
The development may not be good news for the oil market, since low global growth forecast, high stockpile of oil, and September being end of driving season in USA could dampen the bullish sentiment. Libyan oil, that would start resuming its production, would also hurt the oil prices. Therefore, another $5 - $10 drop in oil prices looks a possibility, unless there is news of oil disruption from Nigeria, Iran or Venezuela. But I am not too bearish for oil, as I am expecting resumption of oil demand that will be helped by speculators' attack in the futures market and, therefore, any dip would be short-lived.
Gold: The higher the price, the higher the volatility. This is what the market should be prepared for. In my last week's analysis, I warned of risk involved in gold trading due to its one-sided move, and suggested to wait to buy on dips, as I called for $200 correction. It proved to be a perfect call. Now, gold has formed a nice base, around $1700, though technically $1640 remains my crucial baseline support area. Gold buying has resumed its upward journey.
For the time being, market sentiment will shift towards Europe, as it has a long list of unresolved pending issues in pipeline. ECB President Trichet will be speaking on Monday. Market would be keenly watching for short-term interest rate direction. Greece default is a big possibility. Finland wants collateral against any lending. Germany, too, wants commitment from borrowers. So, the probable risk is that it can spill into European banks.
In the foreign exchange market, we have been witnessing constant Asian central banks buying of euro on dips. That is helping the currency to bounce back despite weak fundamentals. In my view, it provides opportunity to buy dollars. Therefore, I am of the view that that market would begin the week with bearish view on US dollar. But sentiment would remain mixed for each currency.
Euro's initial gain would fizzle out due to weak support from European region. Swiss franc lost its bullish momentum when a major Swiss bank informed its clients that in next few days, for all new inflows, they would be required to pay excess balance fee that pushed SFR to 0.8156. This news was later denied by Swiss Central Bank. Since, technically, SFR closed above a very crucial point of 0.8050, which means that we have entered a new chart pattern zone and should hold above 0.7880 to extend the rally. Japanese yen tested 77.50 an important level on charts, but quickly regained its lost strength, which means 76.10 is the baseline and should hold. Yen will gradually weaken due to weak economic indicators and flooding of liquidity. Pound sterling, though, could make small gain, but any other upward rally should be used as opportunity to sell Sterling.
FX & Gold Weekly OutLook
GOLD - $1827 is witnessing a perfect move after losing $200, as per my last week's call and has now resumed its upward journey. Strategy remains unchanged: buy on dip suggested. Should hold $1770 for test of $1890, a break here would be encouraging for my next extended target of $1945. Ranges for the week $1770 - $1945.
EURO - 1.4497. Any euro rally should top out around 1.4620, as it does not have enough legs to make further gains. However, a break of 1.4340 would encourage for 1.4220. Ranges for the week 1.4150 - 1.4650.
GBP - 1.6366. Likely to stay above 1.6220 and only a break of 1.6480 would encourage for 1.6580. If seen, top should be used to sell Pound Sterling. Ranges for the week 1.6180 - 1.6580.
YEN - 76.65. BOJ pressure on yen to continue and the currency is unlikely to test new highs. A break of 77.10 would pave the way for 78. Ranges for the week 76.10 - 78.10
SFR - 0.8060. I think we have entered a new band. SFR should hold 0.7880. However, requires another penetration beyond 0.8130 for 0.8240. Ranges for the week 0.7850 - 0.8240.