From the global financial market's perspectives, this week could be one of the most important weeks of the year as two major decisions are due: one pertains to ECB's ongoing bond purchase plan that will be announced by the German court on September 12 while the other is due on the following day that if the Fed is going for third quantitative easing (QE3).
Last week, there were two major announcements as market waited for ECB monetary policy on its rate decision, which remained unchanged. It was followed by ECB chief Mario Draghi's press conference, but he opted to keep mum, avoiding discussion on his bond purchase plan; he seems to have been waiting for the German court decision. On Friday, US Department of Labour released its monthly payroll numbers, which do not include agriculture businesses. Traders were disappointed by a drop in non-farm payroll, which was against market expectation.
For the last couple of weeks, market has been rallying on ECB President Draghi's verbal commitment/intervention that he has new bond buying plan, which is known as Outright Monetary Transaction (OMT) that saw Spanish 10-year bond yield hitting 5.58 percent from the highs of 7.75 percent and Italian bond yield of similar maturity falling to 5 percent.
Though Bundestag, the German Parliament, has already approved bailout mechanism that could be helpful but not an influencing factor, as German court's decision due this Wednesday still poses a major risk to the European financial market if the court rules that the European Stability Mechanism (ESM) and temporary European Financial Stability Facility (EFSF) are unconstitutional. Since such a ruling could bring a misery to the financial market, the courts' softer approach would help bring a temporary stability.
However, despite a positive German court's verdict, unless political understanding is reached and ECB lending rules are eased, the key to obtain this facility is that the countries faced with debt problem will first have to ask for bailout funds that will be conditional such as deficit reduction, which certainly means spending cut that may initially lead to a further slowdown that also requires quite a few structural reforms. So this is not going to be an easy ride for the bailout requesting country, as it will surely have to come across many political hurdles and compromises.
Meanwhile, a two-day Fed meeting on September 12-13 will be an important event of the week, as Friday's weaker than expected US job numbers have increased market expectations for the third round of bond buying, which will only be possible through money printing.
For doves, a drop in payroll may not be good news for the US economy and it increases the probability of QE3. But there is another argument, which makes a lot of sense and good reasoning for the Fed to delay easing. It is because the young adults did not apply for jobs probably, as they went back to complete their schooling. It had resulted in a fall in labour force. This has caused a fall in unemployment rate that had dropped down to 8.1 percent from 8.3 percent because when there are fewer people applying for jobs the labour force gets squeezed as labour department counts only those that had applied for jobs.
Therefore, my view on QE3 remains unchanged, as I see no reason for another funding, unless businesses are ready to expand. It makes little or no sense to go for another easing when business cannot take advantage of zero interest rate policy. Another easing could pose a bigger threat to the economy, as it will inflate commodity prices and will invite inflation.
If the US central bank is really serious to stimulate economy and wants prosperity then it should cut the 0.25 percent interest rate that it pays to banks on funds they deposit and instead the Fed should push down the rates into the negative territory, which means that if a bank wants to place its deposits with the Fed, then the bank will have to pay charges to the US central bank for placement of funds. If the Fed goes for 3rd bond purchase then I would like to question the reasoning as the Fed's liquidity injection since 2008-09 has pushed bank reserves over USD 1.5 trillion, which is well above the banks reserve requirement that clearly indicates that banks are in no mood to lend money. The purpose of quantitative easing is to bring stability, increase business activity and create new jobs.
Pushing of interest rate into a negative territory is a very effective tool that was most recently applied by Denmark Central Bank in July this year and its economy is reaping positive results. The European central bank has already slashed its deposit rates to zero pct and I will not be surprised if Draghi the magician comes up with a negative deposit rate surprise.
GOLD @ $1735.40 - This week's move in gold will largely depend on the ECB and the Fed factors. We are likely to see a choppy and volatile session with a wide trading range. Technically, $1755 is the next level to watch; a break will open gates for a test of $1785-95 zones. A fall below $1690 will confirm top seen and a drop to $1655. A break here will encourage to test $1620-30 zones.
EURO @ 1.2815 - Hard to predict in view of important events during this week, but choppy trading conditions to prevail. Initially, we could see Euro capping below 1.2920 and could exhaust around 1.2850-80 zones for a minor correction, but 1.2720 should hold for another upside attack. Only a break of 1.2940 will threaten an attack towards 1.30's. However, a break below 1.2650 confirms top seen. Range for the week: 1.2520-1.3050
GBP @ 1.6008 - Cable may find good support around 1.5880-00 levels, but I will never be comfortable around 1.61-62 zones, as UK has its own problem. For long anything above 1.62 should be good opportunity to book profit especially for deposit holders. However, fall below 1.5820 confirms top seen. Range for the week 1.5750-1.6280
JPY @ 78.25 - Japanese currency will continue to enjoy its safe-haven status and to keep track of Japanese currency follow US 10-year treasury yield, as yield gains on hope of QE3 is likely to support Yen, but resistance is around 77.20-40 zones. On the up, a break of 78.90 will encourage a move towards 79.20. Range for the week: 77.20-79.20.
CHF @ 0.9440 - Swiss Franc weakened against Euro on fear that SNB could raise the floor from current 1.20 rising to test the highs of 1.2155. However, I do not see SNB acting, as it would rather prefer to wait for this week's event. The Swiss currency has a strong support around 0.9350-70 zones and is less likely to make gains beyond this level. A break of 0.9540 could further weaken SFR that may test 0.9595. Range for the week: 0.9320-0.9680.
AUD @ 1.0385 - Australian Dollar could make some more gains, but may struggle beyond 1.0480 and if this level surrenders top should somewhere around 1.0550. Any up move would be a good opportunity to short the Australian currency for bigger drop. A break of 1.0250 will encourage for further fall towards 1.0180. Range for the week: 1.0150-1.0580.