On fiscal cliff, China, euro and BoE

<p>Gold lags behind the sell-off in risk-on instruments (equities, oil and non-USD currencies) as the fear of prolonged budgetary stalemate from the Presidential/Congressional status quo […]</p>

Gold lags behind the sell-off in risk-on instruments (equities, oil and non-USD currencies) as the fear of prolonged budgetary stalemate from the Presidential/Congressional status quo and eventual fiscal cliff threatens to erode 1% from US GDP and give no choice for the Feds but to stay on course into 2014 to the benefit of gold and precious metals.

Sterling resilient on expected BoE pause
Sterling outperforms all major currencies (except for USD & JPY) amid expectations that the Bank of England will remain on hold as the £375bn asset purchases programme expires this month. Considering the return to positive growth in Q3 and marked gains in employment, the BoE could afford to pause this week before considering an additional £50bn round in December.  Sterling gains on a relative basis, underperforming only USD and JPY.

$1.35 EUR/USD target remains on track

Fundamentally whether the US ends up in the outbreak of the fiscal cliff or simply delays it, the materialisation or the threat of a clear deterioration in GDP (FC may cause as much as a 1% drop in GDP growth) will give no choice to the Fed but to resume (and possibly deepen) its policy of asset purchases.

Such a US dollar-negative programme is likely to be magnified by the onset of the impact on Asia and Europe (China and eurozone GDPs may lose by 25 basis points and 50 basis points from their respective GDPs), giving the ECB no choice but to step up another form of asset purchases, with or without a formal request for aid.

Even China is in the midst of an ultra aggressive easing monetary policy, injecting as much as RMB 379 billion in open market operations last week (not as publicised as changed interest rates and reserve requirement ratios). In fact, we expect Beijing’s new leadership will go for the full fledged stimulus package after the Chinese New Year in February when markets are in a better position on where they stand with regard to the US fiscal cliff.  The drawback to such aggressive action is the inflationary repercussions (real estate and commodities), but we deem these to be secondary to the concerns stemming from the already falling demand from eurozone (Europe is no longer China’s biggest export market) and potentially sharp falloffs from the US in the event of a triggering of the fiscal cliff.

Technically euro charts helped make the case for our $1.35 EUR/USD target to remain intact, despite previous calls for it to materialise by early November. According to proprietary long term monthly stochastics, we expect interim downside to reach as low as $1.2610-30s  (according to weekly oscillators) before mounting a December rebound back to 1.32 and 1.35 towards mid Q1.

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