Week ends on a better note as European leaders show resilience

The weeks ended on October 9, 2011, closed on a better note as the European leaders showed some resilience to address the banking sector issues and were showing willingness to fix their problem. The European Central Bank (ECB) was offering the struggling banks to buy from them long-term bonds, to avoid credit crunch.
However, in the weekend late night development, Fitch downgraded Spain to ''AA-'' (Double ''A'' minus) from ''AA+'' (Double ''A'' plus), with outlook negative, and Italy, too, with negative outlook was slashed to ''A+'' (Single ''A'' plus) from ''AA'' (Double ''A''). Portugal remained on review, for possible downgrade to ''junk'', and lately Moody''s warned of chopping Belgium''s rating, which is currently rated as Aa1.
Though the ECB is giving assurances that the euro zone has enough liquidity, recapitalisation of European banks is the next big thing fast cropping up. If not sorted out quickly, it could be very damaging for the financial market. The European Commission is urging its members to come up with a co-ordinated plan to recapitalise the banks, and get rid of toxic assets. Talking is not enough, the pressure is mounting and the credibility of European leaders is at stake, it warned.
During the week, US economic data showed signs of recovery, helping fear of recession to recede. Manufacturing, exports and production made gains; spending increased in construction business; and orders for capital equipment were on the rise. It was the US payroll data which initially gave more confidence to the market that immediate threat of recession could be delayed, if not avoided. But larger gain in payroll numbers was due to workers'' returning from strike. It is not necessary that current payroll data will add to the GDP figures; instead, it is the retail sales and consumer sentiment that may reflect better picture of the economy.
Two other major events of the week were policy announcements by ECB and Bank of England. ECB''s decision to hold rates was against market expectation as a rate cut was expected after September''s higher CPI number. But drop in euro region''s services and manufacturing output balanced the rising inflation pressure and gave the ECB enough space to ease. Market was also confident of a rate cut due to slowdown of European economy and, since this was the last outing for ECB boss Trichet, it was thought that he might soften his hawkish stance, which would provide room to the incoming successor, Dragi.
On the other hand, the Bank of England (BoE) had other ideas, and its policy makers were quick to shift their stance. Three months ago, some of the BoE policy committee members were demanding a rate hike, and no one was expecting quantitative easing until November.
Despite the risk of Britain''s inflation getting closer to 5 percent in the coming months against its inflation target of 2 percent, the BoE felt the urgency to increase the size of its asset purchase program by £ 75 billion to £ 275 billion, which will be stretched up to four months. This is a proactive measure to stimulate economy, which clearly indicates that easing was given preference over high inflation rate, fearing more unemployment, larger deficit and possibility of further deterioration of UK export as a result of global slowdown.
In the foreign exchange market after the ECB decision to hold rate on fear of rising inflation in the euro zone, the euro bounced back, making a recovery of nearly 380 pips. But for the moment European troubles are uncountable. Spain and Italy''s downgrading and Portugal and Belgium under rating agencies'' review may add to the European woes. Any delay of bank recapitalisation would cause more damage to the currency. So, sell high, and buy low, to book profit.
Two other major events were BoE''s announcement to inject funds to fight economic slowdown despite high inflation by increasing the size of its assets purchase program by £75 billion to £275 billion gave boost to sterling on belief that BoE is serious in mending its domestic problem and earlier BoJ''s decision to maintain its policy rate unchanged at 0.10 percent.
Gold''s only hope for the big rally is Fed''s quantitative easing, which may not come soon. The central bank''s buying could also lend support to the metal, which is unheard of. Probably they have gone on the defensive to hold cash dollars in fear of global liquidity constraint. Holding of gold for investors becomes an expensive proposition due to zero return, and is discouraging buyer. One good example was Friday''s last-minute sale of gold by investors, after the downgrading of Spain and Italy, as they had to raise cash on margin calls amid losses in the equity market.
Liquidity problem, weakening of currencies and strong dollar would continue to weigh on gold. The shiny metal has also lost its charm of safe haven status, which is not encouraging the investors, for the moment. As this situation will not last for too long, as economies will once again divert towards quantitative easing, they should prefer waiting for lower levels to buy gold.
FX & Gold Weekly OutLook, October 10-14
GOLD - $1639.80. I remain bearish for gold in short term, though I am raising my resistance level to $1698. A dip below $1605 would make room for $1582 and a test of $1532 remains a huge possibility, or else $1745. Range for the week $1530 - $1698
EURO - 1.3378. Any up move of euro should be used as opportunity to sell. 1.3580 remains the top of the range. A break of 1.3240 will push the currency towards 1.3130, as 1.3040 is intact, or else 1.3640. Ranges for the week 1.3040 - 1.3580
CHF - 0.9272. Use resistance level to sell Swiss franc, as it will continue to bounce back and provide profit opportunity. Resistance levels are 0.9130 and 0.8910 for 0.9310 & 0.9430
Range for the week 0.8910 - 0.9430.
GBP - 1.5558. A break of 1.5590 would push the pound to 1.5690, looking for a break of 1.5410, which would push it to 1.5350 or 1.5270. Or else 1.5750 Range for the week 1.5270-1.5690
YEN - 76.73. Range trading will continue. Ranges for the week 76.30 - 78.50.