Since last week, a disappointing US unemployment figure, a negative Philadelphia Fed index from the US, and a lower than expected Canadian leading indicator release have renewed concerns about the mid-term prospects of the global recovery. Also earlier this week, a slowing eurozone PMI down to 56.1 from a previous 56.7, with an expected 56.4, and a Moody’s report warning that slower growth could lead to a European ratings downgrade (while France struggles to hold on to its AAA rating), have continued to increase these global economic concerns.
Some economists have also gone as far as saying that, in the United States, it is not a question of whether or not we are heading towards a double-dip anymore, as the negativity of the economic data may suggest we are already there. The US economy seems to be caught in a vicious circle, people do not spend because they are unemployed or fearing unemployment, while businesses are not hiring because demand is frail and they are operating in an environment of uncertainties (too many new rules and regulations, higher costs for employees’ health care and expectations that taxes might go up next year).
The US dollar keeps playing a dual role: when markets believe a particular negative release is a US-economy-only problem it is a dollar-negative, but when markets believe that the negative release is a US economy but also a reflection of the global situation, than it is a dollar-positive.
Even in equity indices, this week the Nikkei breached the 9000 level, which level had not been crossed since May 2009. Risk aversion keeps dominating the markets, as investors are still concerned on the risks faced by the global economy.
Last Friday, we saw a resumption of downtrend for the single currency, when the EUR/USD broke the 1.2778 level. The level was the 38.20 per cent Fibonacci retracement level when marking the retracement levels between 1.3334 August highs and 1.1879 June lows. By and large, the 1.2778 level was a key support which had long served as a support but which had already been tested in mid-August. At the time of writing 1.2606 (the 50 per cent retracement) is already being tested while the pair has already reached lows of 1.2604 for the day.
From the United Kingdom, as well, a BoE policymaker and member of the Monetary Policy committee, in an interview last Tuesday, expressed renewed concerns of the UK sliding back into recession, and of over-optimistic growth forecasts. Martin Weale cited dangers coming from unemployment, declining house prices and another banking crisis. His comments helped push the British pound to one-month lows against the US dollar early last Tuesday.
Given the market’s uncertainties gold is still seen as bullish for the moment. Even though the increase in the price of gold from $1092.70/ounce around the end of 2009 to trading at around $1218.9/ounce earlier this week may have somewhat consolidated with the relative decline in risk aversion – the forecast for the following 12 months remains positive. Forecasts are based on increased demand for jewellery, especially on the back of Asian wealth creation, and on the fact that even though there might be a relative improvement of debt problems, underlying concerns remain in place. Analysts at UBS hold three-month forecast at $1300/ounce and 12-month forecasts at $1500/ounce.
Unlike gold, silver is expected to trade in range. Price movement is expected to be dominated by two opposing trends; on one side the metal should find price support on the back of a stronger gold price – the largest portion of silver comes as a byproduct of copper, lead, zinc and gold mining, hence costs are not meaningful, and this in turn places gold as a benchmark for silver pricing. On the other hand, given that around half of demand for silver is induced by industrial processes, the prospect of slowing global growth could be expected to weigh on the price of silver.
Australia went to the polls over last weekend – election results apparently have not led to any defined majority from the competing parties yet – and it seems to point towards a hung parliament, the first since World War II. Talks for a coalition government are already gearing up but nothing is conclusive. Initially, miners’ shares were gaining as markets were betting on the fall of the labour party together with its proposed miners’ tax, but these gains were later erased throughout the following day.
Upcoming FX Key events
Today: US weekly jobless claims.
Tomorrow: Swiss KOF Indicator, US GDP, and Michigan Confidence Indicator.
FX Technical Key points
EUR/USD is bearish, target 1.1800, key reversal point 1.3400.
USD/JPY is bearish, target 80.00, key reversal point 90.00.
GBP/USD is bearish, target 1.4000, key reversal point 1.6500.
USD/CHF is neutral.
AUD/USD is bullish, target 94.00, key reversal point 84.00.
NZD/USD is bullish, target 0.78, key reversal point 0.6800.
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Mr Muscat is senior trader at RTFX Ltd.