
Seeking a compromise
The re-election of President
Obama will not change market trends, at least for the short-term. In fact, after a brief increase, the US dollar
should remain under pressure, capped by the huge deficit and the political
fight over the “fiscal cliff.” The U.S.
dollar index, which averages a basket of six currencies, could briefly rise to
81.50-82.00, before selling-off to 78.00-76.00 again. The end of December is
the first deadline for the power struggle in Washington D.C., by then, fiscal
negotiations should equip President Obama with a plan for the next four years. In reality, the risks of going over the so
called “cliff” have risen lately: Republicans do not want higher taxes, while
Democrats wish to pursue higher taxes for the wealthy; nonetheless, a sort of
agreement between the parties is expected. If no agreement is reached, the debt ceiling
deadline of February/March should oblige the two parties to find a compromise
over the fiscal matters. Recessionary
winds are blowing; financial markets should consolidate until a clear decision
is made, but a non-decision in spring could result in massive stock selling.
Japan: What Will Happen Now?
It is now official:
Japan is in a recession and a strong Japanese yen is not advisable. The slowing of global trade is undermining
exports. Core machine orders,
an indicator for capital spending, fell by 4.6% in September. Foreign orders were unchanged, but they fell
by almost 16% in August. Bad
relations with China, accentuated by the dispute over the Senkaku islands, have
not helped exports either. The GDP could end up below 1.0% by the third
quarter of the year. The Bank of Japan
announced it would buy an additional Japanese yen 11 trillion in assets, and it will
favor unlimited funding for a lending program. As a result, commercial banks’ new practice of
lending to the private sector will be supported by the BoJ. The results are uncertain; in Great Britain,
as an example, the demand of credit by the private sector was strong when a
similar approach was implemented. USDJPY finds a good technical support at 79.00/78.00, and a rebound to 82.00 is a
possibility over the coming months. The
large head and shoulders formation, coupled with a divergence between price and
the RSI indicators on the daily/weekly charts, should help USDJP.
A “Wait and See” Approach for ECB
ECB president Mario Draghi expects only minor improvements in 2013. So,interest rates should remain on hold for
now, unless numbers severely deteriorate. These were the results
of last week’s meeting in Brussels. The
financial crisis might be ending, but Europe is still in a recession: economic
conditions have weakened in France and Germany, and in September, industrial
production fell 2.7% in the former and 1.8% in the latter. The positive effects of Outright
Monetary Transactions (OMT) in terms of
consumer confidence have not materialized yet. The ECB confirmed funds are ready; nonetheless,
a country needs to ask for assistance in order to receive help. When will Spain make the first move? Global financial markets are focusing on the
idea that Madrid will soon ask for assistance. The yields of the Spanish bonds will again rise,
if this perception changes. EURUSD could correct to 1.2650/1.2550; however, the
longer-term prospective is bullish. The
market can increase to 1.36-1.44 over the medium-term.
Angelo Airaghi, www.ProfitsOn.com
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