FX & Gold weekly outlook - September 17-21: Inflation still very low in global debt-ridden economies

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Economic Updates - Economic Fundamentals

Excessive volatility witnessed during the week was caused by two major events. One was German court ruling that went in favour of European Stability Mechanism (ESM). ESM, one of the essential tools to fight the regions crisis, was supposed to become operational in the first week of July that contributes 27 percent or USD 245 billion of funds.

However, the key point inserted in the court ruling is that the German government has to get Bundestag endorsement or parliament's approval for all matters pertaining to ESM or any other Euro-project, which also means that there is capping of up to USD 245 billion for which Merkel's government has already obtained approval.

The second major event of the week was Fed's decision to buy more bonds by providing the third round of quantitative easing (QE3); (it) confirms that the US economy is still struggling hard to recover and therefore asset bubble price or commodity price hike is a secondary and unimportant issue. Another round of QE is surely a pleasing news for borrowers and speculators at the cost of savers and government money, but this also means increase in risk. The Fed committing to stretch the zero interest rate policy period until 2015 is a quite depressing news for savers who will have to pay the price for borrowers' financial adventuresome because official inflation has been hovering around 2 percent for about a year; it is likely to pick up with the passage of time as global commodity prices have been rising sharply. So poor savers will continue to suffer as they will be getting a negative return.

The Fed was able to dodge the market by making a tricky announcement by not providing the total amount of QE3 money that they will provide to purchase mortgage-backed securities, instead they decided to buy USD 40 billion monthly until the US labour market improves sufficiently. This amount can soar to USD 600 billion instead of USD 500 earlier estimated.

Unfortunately, however, the rich and the elite of global business community, instead of contributing through tax increases and committing to provide better growth related environment, they continue to enjoy cheap money made available to them and are having some of the best times at the cost of poor economic management by the global financial leaders/managers. Neither German court ruling inserted any such clause to ensure that its tax payers' money will be protected and will not be thrown in the pit, nor has the Fed ever provided or is being seriously questioned about providing evidence that the purpose behind printing of money is aimed at new business openings to help increase revenue collection and US exports to create more new jobs.

If we keep track of spending data of the last 5 years, it is the banks, financial institutions, stock markets, gold, oil and crop producers that are blessed with the huge sums of easy and cheap money and are having best of times. Whereas, the economies/businesses that were supposed to get funding in trillions are still in deeper trouble because the real money does not reach them due to flawed policies and yet the governments of major economies struggling for funding is still enjoying high ratings by rating agencies instead of placing those economies in junk category, as need more unknown amount of funds for its survival.

But what is more interesting is that despite all indicators pointing to higher prices, inflation in all the major debt-ridden global economies is at extremely low level. The Eurozone leaders want a free hand for free funding at a very low borrowing cost though not sure that how much and until when they will be required to print notes. They have failed to provide a plan on how they will return the borrowed money.

It has now become increasingly obvious that inflation is artificially kept low to support easing policy and zero interest rate policy. If the governments seriously want businesses to flourish they are simply required to make a co-ordinated effort, by opening their oil reserves, flooding market with their food holdings kept in reserves, announcing sale of their gold holdings and declaring that global central banks will charge on deposits and most importantly reducing to sale of government securities.

Such decisions may hit big business enterprises, but money will start flowing towards genuine businesses. Banks will be forced to lend to old and new businesses, which may ultimately lead to economic revival.

Overall market could be sensing some sort of stability after the two major events. The German court ruling in favour of ESM will provide more space to the Europeans though Spain still remains a big worrisome factor and news of its bailout will once again create volatility. Apparently it seems, that the Fed's open-ended QE3 policy announcement will provide a relief to financial market, but dividing the period into a monthly basis could be used as another effective tool in the hands of the Fed that could spring surprises trough its FOMC meeting and speeches by Fed officials. Hence, major focus should now shift towards all economic news/datas. Despite all the happenings, medium to long-term stability cannot be guaranteed as any negative news can bring a spark in the financial market.

GOLD @ $1769.70 The expected upward rally continued before stabilising around $1770 level. We could see some more gains, but the risk of profit-taking will continue to remain a threat. Buying interest on dip will be seen as a break $1755-60 zones; it will open gates for a possible test of $1740-45 strong support area. On the up, a break of $1785-88 levels could possibly lead to a possible test of $1798-04 zones.

EURO @ 1.3127 = In the last couple of months Euro surged by over 1000 pips, which is very unusual. History tells us that correction does often take place, so any reason could be a good excuse to clobber the main European currency. This week, the challenge will be a break of 1.3190 levels that will risk a test of 1.3250-60 zones; if breaks, a test of 1.3310-20 will then be possible. However, real test on the downside will be at 1.2870 on break of 1.2950, which could challenge Euro to show it muscles. Range for the week: 1.2850 - 1.3320;

GBP @ 1.6212 = Cable will remain traders' favourite currency, as traders are always keen to buy in dips. It has a resistance around 1.6280 and a break could push the British currency towards 1.6250 zones. Therefore, buying interest is expected around 1.6150 and a long as 1.6070 is protected, the GBP will be bought on dips. But caution is required if Pound Sterling is unable to hold the 1.5970 level. Range for the week: 1.5970 - 1.6380;

JPY @ 78.28 = Noticed a fine dip, but as I mention in my last week's note that resistance will be found around 77.20-40 zones. Yen eased off after hitting the given level and nor to required to move beyond 78.80 or else we could see another attempt towards 77.20. Ranges for the week: 77.20- 79.20;

CHF @ 0.9267 = Though weak against Euro fearing upward adjustments of peg, nervousness will prevail due to threat on SNB intervention. Next resistance levels for the Swiss currency are at 0.9180 and only a break here will risk for a test of 0.9140-50 zones. However, a break of 0.9380 will see more easing of Swiss currency towards 0.9450. Range for the week: 0.9150; 0.9480;

AUD @ 1.0548 = AUD against all odds may do well if it breaks 1.0630-50 zones that push the Australian dollar towards 1.0710. However, keep a close watch at 1.0480. A break could see losses extending towards 1.0410-20 zones. Range for the week: 1.0380 - 1.0720.

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