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.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.