Daily Market Updates

Thursday, Aug 04 2011

By
M.Zohaib Gadit
Forex Trading Consultant, Shivani Financial

Gold Trend Technical:

Yesterday again gold has achieved target level of $1675. Now gold is range bound between $1653 and $1675. Breaking any of these levels will show upward and downward trend. If gold break $1655/53 next level to watch is $1632 and then $1608.Overall market needs downside correction so investors are advised to trade with stop loss to avoid heavy loss.

Fundamental:

Gold traded near an all-time high as investors sought a refuge from depreciating currencies amid concern the U.S. Federal Reserve may provide additional stimulus as the economic recovery falters. Japan joined Switzerland in taking steps to weaken their currencies as concern the U.S economy is slowing drove investors toward safer assets including gold, the yen and Swiss francs

SNB Goes For Quantitative Easing As Franc Appreciates Sharply

The SNB surprised the market by announcing it narrowed the target range for the 3-month Libor from 0.00-0.75% to 0.00- 0.25% and is aiming to lower it to 'as close to zero as possible'. Moreover, the central bank will 'very significantly increase the supply of liquidity to the Swiss franc money market over the next few days'. The unexpected move has been driven by the sharp appreciation in CHF as investors fled to safe-haven assets.

At the statement, the SNB said that the global economic outlook has 'worsened' since the previous monetary policy meeting. Switzerland's economic outlook has also 'deteriorated substantially' with the sharp appreciation of CHF. Policymakers stated that 'current strength of the Swiss franc is threatening the development of the economy and increasing the downside risks to price stability in Switzerland'.

In order to counteract against tightening by rising CHF, the SNB will expand banks' sight deposits at the SNB from currently around CHF 30B to CHF 80B. The central bank will not renew repos and SNB Bills that fall due and will repurchase outstanding SNB Bills, until the desired level of sight deposits has been reached.

The move showed the SNB's determination to curb the strength in Swiss franc and further intervention may be done should current actions prove to be insufficient. We believe the intervention will lead to a weaker CHF in the near-term. However, as long as global economic uncertainties persist, CHF, as well as other safe assets, will remain attractive.

ECB Meeting Due Today

Today ECB meeting will be another extremely important set-piece event and President Trichet will need to give a commanding performance to help head-off a potentially terminal crisis for the Euro area without destroying the ECB’s credibility. Logically, given the Euro-zone developments and increased economic risks, the bank should shift towards a more neutral position on interest rates which will send an important signal and weaken the Euro

Comments on Euro-zone peripheral bond purchases will also be extremely important and the Euro will gain big support if the ECB shifts its position and announces that it will resume bond purchases. Selling EUR/USD above 1.4330 ahead of the ECB meeting is a good option, but tight trailing stop losses will be essential to guard against the possibility of Trichet giving peripheral economies a life-line

The ECB is not going to admit that they made a mistake in July, but there is the potential for a significant shift in language. The ECB must recognize that the risks to growth are now weighted more firmly to the downside and they should also express some hopes that secondary inflationary risks are starting to subside.

It still looks like July’s interest rate increase was a huge mistake purely on economic grounds, especially as the growth indicators have flashed warning s since the meeting.  The PMI manufacturing index was confirmed at  50.4 for July with the services sector also slowing sharply.
As far as inflation is concerned, the flash Euro-zone inflation index dipped to 2.5% from 2.7% previously.  This is still above the 2.0% target rate, but it certainly looks like a peak has been seen, especially as commodity and oil prices have come off the boil on signs of weak economic global growth and a slowdown in Europe. In historic terms, its worth noting that the peak headline inflation rate during 2008 ahead of the crash was 4.1%.

If the ECB takes a hawkish tone at Thursday’s meeting, the Euro could gain some immediate support, but there is a strong probability that selling would increase again very quickly and reverse the initial trend. There would be greater fears surrounding the Euro-zone economy, especially with peripheral economies stuck in recession. There would also be increased fears surrounding the banking sector as liquidity would be likely to deteriorate further and there would be real fears over a devastating credit crunch.

Peripheral yield spreads have widened again over the past few days with Spanish yields briefly above 6.40% while Italian yields are above the 6.00% level which puts both countries very firmly in the danger zone. The ECB could certainly alleviate the crisis by promising to restart the Securities markets Programme and it must be tempting to crush speculative funds that have been shorting peripheral bonds. There would, however, be a big price to pay and the whole ECB stance of putting responsibility back on Euro-zone governments would be wrecked. The ECB will not want to re-engage severe moral-hazard risks by taking on sole responsibility at this stage.