The market in the FOMC rhythm

The IMF data shows that the general reserves of Saudi Arabia made $582 bln.

The traders manipulate prices in the market again, dollar dynamics predetermines the movements of all main tools which can be evidenced by inadequate currencies reaction. Last week it has been shown that it is not worth being fond of the American statistics, as the FRS can show activity at any time and develop the market in the direction of its interest.

If the FOMC has explained earlier that its actions are based on statistical data, then now its optimism in the forecast becomes dangerous. The dollar has shown strong two-day growth on a wave of a signal from the FRS, but not everyone has been convinced that the dollar will further move towards normalization of a monetary policy.

This week the FRS representatives were rather rigid in the statements, as well as in the published protocol summarizing a meeting of the Committee held in April. The market participants have missed the fact that the FRS is always anxious with the considerable volume of liquidity in the USA. Risks of financial bubbles remain significant, that means that the Central Bank intends to control the liquidity by the increase in the cost of the loans.

There exist some tough protocols, which provide more than mere summary of the general statement. The rates will be raised at any opportunity especially when the substantial inflation growth in April due to the growth of the energy resources prices has strengthened chances of increases in June. Of course, if following the results of a referendum the UK leaves the EU, then it is necessary to wait for increase of a key interest rate, at least, for 0.25%.

The meeting of the G7countries in Japan has caused active discussion about Japanese and American financial authorities opposing each other. Strengthening of yen by 15 figures for quite short period of time has not led to the peaceful co-existence. Although the countries aspire to that everything looks decently, the Minister of Finance of Japan Taro Aso has stated that Japan intends to abstain from competitive devaluation. Kuroda before a meeting in Sendai has again assured in determination (if necessary) to take additional measures of the monetary policy mitigation for the achievement of 2% inflation. His estimates of the positive influence of the negative rates on national economy have allowed USD/JPY to be corrected slightly up.

In the light of discussion of the current currency wars, there is a distinct opinion of the representative of the Ministry of Finance of the USA about that the the policy of obtaining advantage by means of pressure upon exchange rates negatively influences the world economy. Nevertheless, it is hard to believe in sincerity of such statements looking at the actions of the American regulator.

The commodity currencies of the export-oriented countries which are closely connected with Chinese trade and the mining industry actively sustain market losses. Striking example is Australia. But at the same time more aggressive comments in FOMC protocols cause the sharp growth of supporters of US dollar. Today the large investor is in search of strong currencies, and therefore is ready to indulge in wishful thinking.

The following information should be taken into account:

  1. The growth and monetization of the debts of the Central Banks of the leading countries is used as the main method of preservation of the prices of assets at the overestimated level that in turn leads to the infinite growth of world debts. Contrary to wrong analytics (and promotion), the total volume of the American debts has not reduced, and according to the data of consulting company McKinsey for 2015 has increased by $60 trillion, and since the beginning of 2016 it has been necessary to add $5 trillion the Chinese debt to this sum. The question arises as to what is a debt limit for the USA as the world's largest debtor and what will occur when it is reached. We recommend to watch the relation of the American non-financial debts to GDP especially when it goes beyond 300%. At this level the financial system has failed in 2008, and today this consolidated economy indicator is already reached 275%.
  2. The IMF has determined requirements for continuation of financial aid to Greece: except a consensus of creditors on restructuring of the Greek debt, the government has to set out the plan of reforms, first of all the reforms of the pension system which Athens persistently does not agree to perform. In July Greece is obliged to make next payment of €3,5 billion to the European Central Bank. The upcoming meeting of the Eurogroup on the matter is planned for May 24, but judging from the fact that the IMF will be represented not by Christine Lagarde, but by the head of the European division Paul Tomsen, it is not expected that the fund will adopt any serious decisions following the results of a meeting.
  3. According to the Law on Free Access to Information, the Treasury of the USA has for the first time opened data on that Saudi Arabia holds the American treasury bonds on 116.8 bln. dollars by the end of March. The IMF data shows that the general reserves of Saudi Arabia made 582 bln. dollars. Reserves of crude oil in Saudi Arabia continue falling (the fifth month in a row), having reached the minimum low for the last 1,5 years. It means that the crude oil is actively traded while the policy of oil war proceeds. In the long term it will lead to further reduction of reserves and stabilization of the demand/supply in the market. Demand for dollar will be minimized in the next few days and the conditions will appear for restoration of the prices of the main oil Brent and WTI brands to the level of $50.
  4. According to Bloomberg, the Central banks lose trust and an indicator to this is gold which became the one of the best traded assets following the results of a quarter. The impossibility to develop the investment portfolios steady against the current economic volatility, leads to the fact that volume of gold in index funds has been growing in the highest pace since 2009 (China, Russia and Kazakhstan remain leaders). Under the data of the World council for gold the countries will buy from 400 to 600 tons this year compare to 566.3 tons in 2015.
  5. Chinese market reacted to the publication of the FRS protocols by the latest collapse of yuan, the second for the size since August, 2015. The USD/CNY has grown by 0.48% (to 6.5531). The purpose of this increase is to put pressure upon process of increase of interest rates of the USA which can lead to strengthening of outflow of the capital from emerging markets. It is clear, that Yellen does not want to depart from her forecasts with two increases of a rate in 2016, in turn the Chinese Central Bank is ready to devaluate the currency to critical levels.

EUR/USD: intraday supports: (1.1194/1.1187) - (1.1155/1.1131) - (1.1105/1.1030) protect key levels 1.1111 and 1.1000, but possibilities of decrease in couple look limited. Resistance: (1.1257/1.1263) - (1.1288/1.1295) - (1.1350). Growth is possible at mass positive statistics.

GBP/USD: medium-term border of risks 1.4353/1.4738, resistance 1.4769/1.4679/1.4664/1.4636, supports 1.4561/1.4561/1.4530/1.4493. Most likely growth which dominated last week will continue. Thereby the potential for future falling before results of a referendum collects. Only the weak statistics of this week or verbal interventions of officials can stop a tendency.

The interesting technical picture has developed in basic cross-country of EUR/GBP: on the day schedule the Head Shoulders is accurately visible. The price has the strong potential of return to 0.7770/0.7800 to test earlier punched resistance. If retesting takes place, then it will be followed by the strong descending movement to level 0.7360.

Author: Navsher Bartash,
ForexChief Currency strategist