Friday's euro rally was remarkable hitting an 11-month high against US dollar as European banks will be paying back their cheap borrowing ie, Long Term Refinancing Operation (LTRO) money, which will be in excess against market expectation of Euro 85 billion. ECB expects that on January 30, as many as 278 banks will repay loan amount of Euro 137.2 billion.
It appears to be a confident move as LTRO injection was made to clam the European debt crisis. According to the ECB, Europe's troubled banking system is willing to pay back cheap 3-year loans that were offered in the last quarter of 2011 and early 2012, but doubts hover over how paying back such a large amount of cheap borrowed money will help the market in near-term because paying LTRO loans mean a squeeze in liquidity that has also helped euro to climb.
The worrying part is that to meet liquidity shortfall banks will be required to sell their bond holdings from their current portfolios or else the ECB will once again be required to inject liquidity if funding shortage re-emerges in future, because paying loans not only will have a tightening effect, it will also reduce the size of ECB balance sheet.
There are talks that ECB is considering new lending rules, which could demand from banks to provide more collateral to protect and improve the quality of lending. It will ensure that all loans are made to stimulate growth in the Euro-zone region. Such a move will enhance the credibility factor and rating agencies will be compelled to upgrade country's rating that could further reduce the borrowing cost.
Initially during the week, we could see some more celebration for next couple of days by the Euro bulls and buying interest will emerge on dips. One will not be surprised to see more Euro gains and run-up to catch news highs looks, but market will have to make correction for the biggest event of the week, as we approach Wednesday's FED monetary policy announcement that will be followed by a press conference.
The key word that market will be expecting from the Fed will be "accommodation". It is to be seen whether the Fed will continue to accommodate or is seriously considering a flip. With an additional USD 45 billion in January this year to its earlier USD 40 billion monthly purchase of mortgage-backed securities in September last year, the overall impact on FED balance sheet is that its total asset as per FED announcement released on January 23 has reached USD 3.01 trillion.
But the worrying factor is that though there are signs of US economic recovery, the growth is not as strong as desired to meet the challenges. A drop in last week's jobless claims indicate that the US economy broadly improving. The question whether or not the improvement is sufficient to bring about substantial changes in the unemployment rate that requires an average monthly creation of minimum 200.000 jobs remains unanswered. More importantly the market is still confused about data distortion due to seasonal factor and hence data, which will be released after two weeks, could give a better picture of the US economy. Prior to non-farm payroll data, the 4th US quarter GDP data will be another major announcement.
GOLD @ $ 1658.15 = Last week gold hit my weekly target of $ 1658-60 comfortably. Recent developments in Europe regarding LTRO (loan pay-back) are not good news for gold, which means a liquidity drain. Earlier, the talk of winding-up of Fed's accommodative policy has already halted gold's surge.
Better than expected US economic data such as a fall in jobless claims to 5-year low, an improved labour market condition and some of the leading indicators showing signs of strength contributing to the view that continuation of trend could compel the Fed to change its policy stance and therefore next week's good job should provide an excuse for further gold sell-off.
$ 1690-95 is surely a strong resistance area, which could be reached on a break of $ 1680. I am expecting more losses as a break of $ 1645 will open gates for a test while break of $ 1625-30 zones, with next target to test $ 1550-75 zones on a break of $ 1590 in the next couple of months.
EURO @ 1.3463 = Repayment of LTRO funds will have a tightening effect and this has given more life to the European currency, but a tighter condition is in negation of ECB's easing policy stance.
European economic data announcement in last two weeks has been very encouraging, especially German economy has shown a strong comeback and therefore, German retail sales and CPI flashes will provide further economic guidelines. Any sense of ECB easing off its policy rates will give room for a correction.
If euro surpasses 1.3540 mark, all eyes should be on 1.3590, which should hold for a drop. Only a break of this level could see euro surging towards 1.3798. However, 1.3340 is a support level and a push below. Range for the week: 1.3250 - 1.3620;
GBP @ 1.5794 = We may either see the bottom or are close to bottom around 1.5680 only if 1.5720 surrenders. I have my doubts. Cable needs to push beyond 1.5880 for a test of a crucial level 1.5970 probably for a test of 1.6050. Preferred strategy, buy on dips. Range for the week: 1.5680-1.6080;
JPY @ 90.87 = I was of view that after the BOJ announcement it will start its asset purchase programme next year and fear of talk of currency war may tone down yen's downward rally. But it seems that sentiment has once again tilted towards further weakening of Japanese currency, as market took a clue from Japanese Vice Finance Minister's statement defending its weak yen policy.
According to minister, his government is fighting against 2-decade old deflation that has shattered its domestic economy, which should be regarded as a correction and not manipulation of currency. He said a drop to 100 yen wouldn't pose a problem giving a jitter to the market.
Europe's and USA's officials have started to show their concern and now involving their leaders. In most recent past we saw protest against China in vain. A huge gap widening of currency gap can be seen against the European currency, but I think Japan will not stay away from this currency experiment, as it has nothing to lose. A possible change after the expiry of BOJ Governor's term will allow Japanese government to appoint Central Bank Governor of its own choice, so Yen corrections should be considered opportunity to buy US dollar against yen as potentially it could lose another 10 percent of its value until the world leaders started to make noise charging Japan for manipulation of its currency. Buy why there should be any protest against Japan's exchange rate policy when the USA and Europe are themselves pouring in trillions to correct their respective economies.
During the week a fall below 90.10 is required for a test of 89.50, but risk for more losses cannot be overruled if 91.90 surrender for a test of 92.50. Range for the week: 89.10-92.90;
AUD @ 1.0422 = As long as 1.0320-40 support level holds the Aussies could make 150 pips recovery. On the up 1.0480-90 is the barrier and a break here would pave way for 1.0525-50 zones. Or else a dip could challenge 1.0270. Range for the week: 1.0250-1.0550.