Virus of the Federal Reserve rates

The world Central Banks have been coordinating the gold policy all the more

The summer market continues to be in a «fever» in search of the answers to two main questions: whether the UK remains in the EU and whether the Federal Reserve raises an interest rate. The fact that the market continues to trust in the dollar fanatically serves as an indicator of the active development of the «illness». The belief is supported by periodic aggressive speeches of the FOMC representatives.

Taking into account the dynamics of pound, it can be assumed that there is a confidence in a victory of supporters of the UK’s membership in the EU. Nevertheless, despite the results of the numerous polls showing decrease in a number of the Brexit supporters, the markets obviously underestimate probability of the decision to leave the EU backed by very influential in the UK forces. The Federal Reserve considers a referendum in the UK as a large risk for the world financial system in general. It is clear that the rates increase depends on the situation around the Brexit, on the strength of the forthcoming NPF and the backdoor policy of the Central Banks.

The Federal Reserve signals of the possibility of the rate increase in June become more obvious, although there are no objective grounds for the increase, considering the general weakness of the US macroeconomic data. The investors have ignored the last portion of economic indicators, which were higher than expected, though they justify rumours on the summer rates increase. The high-ranking Federal Reserve officials continue tenaciously to insist on a possibility of the rate increase in June. Nevertheless there is no clear answer as to why it happens now.

The current situation is more likely escalated under a certain concealed arrangement between the governments and the Central Banks, because both the Federal Reserve’s «pigeons» and «hawks» irrespective of their role have stated about the high probability and the usefulness of such event. Friday Yellen’s speech in Harvard have summarized and confirmed the Federal Reserve «rhetoric of an increase». Manipulation within the markets has been developing according to the plan. While increase affects securities market negatively, the main target of the manipulation is the foreign exchange market.

Now the US is in a difficult situation: they were involved in a currency war between China and Japan as an arbitrator. Approximately a month ago some sources reported about Yellen-Obama informal meetings the main subject of which was the US Dollar to Japanese Yen exchange rate. Japan needs strong Dollar to stop strengthening of its own currency as well as to provide the stable growth and the rate of inflation. Europe also prefers strengthening of the US Dollar. At the same time for the goods to remain competitive, China needs the weak Dollar. China is not ready for the next devaluation of its own currency due to the fears of the outflow of the foreign capital.

There is an opinion that at the G20 summit in February there was an arrangement to lower the US Dollar (for the sake of China) at the expense of Japan and Europe. This time the G7 summit in Japan has enabled the US to help the hosts of the meeting to see Yen as weaker currency. These contradictions have resulted in the current consolidation of USD/JPY around 110, but by the next BOJ meeting on 15 June the analysts of large banks will wait for USD/JPY in a zone 112-113.

It should be outlined that:

  1. Stock markets behaved in a contradictory manner facing the prices of oil. Three key drivers for the growth have been exhausted. Canada has managed to cope with the fires, having removed the fire seat from the oil sand, and will restore production volumes in the near future. Export crisis in Libya is close to its end. Under the Bloomberg data, the bridge Qua Iboe terminal has been finally unblocked in Nigeria and oil shipment has been restored. Therefore, now for the short-term transactions any downward movement can be considered as an opportunity to enter at least at the level of 48.00 dollar/barrel.
  2. Germany has taken the second place in a rating of the largest world creditors, having replaced China on this position as $513 billion has been spent for the maintenance of the yuan exchange rate during the year. The People's Republic of China had reduced net foreign assets to $1,6 trillion by the end of the last year, while the German assets had grown to $1,62 trillion. Although taking into account the huge surplus of the current operations and the speed of accumulation of foreign assets, it is more likely to be a temporary condition for China. Japan continues to hold the first place of the rating as its foreign assets are estimated at $2,82 trillion.
  3. The world Central Banks have been coordinating the gold policy all the more. Taking into consideration the dynamics of the prices for gold, the probability of the creation of new monetary base which will allow buying gold according to the preliminary arrangement at the fixed exchange prices has significantly grown. The implementation of such system gives chance to urge the devaluation of key currencies and to reduce relative burden of repayment of any national debt without damage of the general condition of the debt market.
  4. The Greek creditors have entered into the next agreement which enable them to avoid crash in summer: the extension of the debt repayment periods, the correction of the interest payments and a number of small and obscure conditions. The method of «the superficial decision» with involvement of the IMF with its vision of the debt restructuring is applied again.

The market players are afraid to be late with purchases, but nevertheless euro has closed the week with another minimum. On Monday we will be waiting for a big package of economic data from the EU, and the market reaction to speech of the Head of the Federal Reserve. Any positive signs and an appeal to normalization of the monetary policy will support the US currency that may lead to the correction on the capital assets.

GBP/USD: the pound has most likely settled the potential of the growth against insufficiently strong GDP and uncertainty around the British referendum. However, even in such conditions of GBP/USD still is in demand. Intraday resistance: (1.4700-1.4720) / (1.4826-1.4860). Intraday supports: 1.4600 / (1.4560-1.4526) / (1.4459-1.4383). Key mark 1.4660. Trade will define risks above/below. Pressure of bulls has switched to resistance levels in a zone 1.4750-1.4800. The trend change down requires now closing of day lower than 1.4600 that current week is quite possible.

EUR/USD: players are afraid to be late with purchases, but, nevertheless, euro has closed week the next minimum. Important key support is reached: 1.1111-1.1107. Intraday support in a zone 1.1085-1.1074, strong protection in range of 1.1050-1.1015. Intraday resistance: 1.1122 / (1.1142-1.1155). The movement requires fixing higher than 1.1235 up, it can become the beginning of the ascending trend. Aggression of players amplifies due to closing June (quarter) the derivative of contracts. At the expense of it for breakdown one strong throw with confirmation suffices down. The technical situation demands correction up, at least, to 1.1220-1.1230.

Author: Alexander Ward,
ForexChief Currency strategist