By N Prasad
Financial markets are facing turmoil all over the world and it is not going to end until major currencies stop swaying. Commodities, stocks and bonds are not independent i.e. financial markets’ moves are governed by several factors viz export-import, growth rate, leading economic indicators, currencies, industrial production, unemployment, monetary policies and geopolitical events.

Among these factors currency rates plays the main role in money markets which was evidenced in the past few weeks. The north–south game played by Euro and USD left financial markets in a state of uncertainty. Major economic data, released last week, has thrown light on the directional move of emerging markets across the globe. US durable goods order was surprisingly up by 1.30% against the consensus 0.3%.

The data showed that August British Home Prices posted biggest annual drop since 1990. German Consumer Confidence was at the lowest since more than a decade.

The monthly business climate index, calculated by the Munich-based economic research institute IFO, fell to 94.8 points from 97.5 points in July, its lowest level since August 2005. The German economy contracted by 0.5 per cent in the second quarter of 2008 and evinced hints of recession. The US GDP was higher at 3.3% against the consensus 2.7%. Euro-zone August consumer inflation reached 3.8% against 3.4% in July.

All these economic data did a great favour for the US Greenback and took the same to highest closing level since January 2008. Dollar is once again in the limelight and investors are ready to take chance on it. As soon as the scent of US dollar strengthening diffused, funds, which were parked in emerging markets, started flowing back home.

The reason for the whole drama is that the funds were subscribed by investors in US dollar form and has to be redeemed in same form, henceforth it was not worth to keep Greenback in other currency mode despite good returns in emerging markets.

Status quo did not left even an iota of additional economic growth and insinuated a financial crisis in major parts of the world including Euro-Zone.

European Central Bank (ECB), the apex monetary policy governing body, will have to make a witty announcement on coming Wednesday on interest rate structure under the pressure of higher inflation and growth slowdown. ECB may end up with holding same rate 4.25% and can give a hawkish statement about inflation and pledge to support to fuel the economy for
steady growth.

Did you ever think that what will be the upshots of the status quo?

Who is going to pay for this capsized economic shift?

What will happen to emerging market?

You will find all these questions answered in a few weeks’ time. What I can tell here is that, the present situation is looking like rolls of entangled nets and it is difficult to untangle.

When currency of a particular country appreciates significantly, her imports will become cheaper at the same time exports will become uncompetitive. This will lead to increase in imports and local industry suffers from non-viability against imported goods. It invites double blow of reduced domestic production and depleted exports. This will lead to trade deficit, which is not good for any economy.

Now the ball is in US dollar’s court again. Like India, many emerging economies also witnessed same scenario as Europe. Henceforth, extremities can trigger again on the reverse side too.

Present situation may lead the collapse of Euro to a new level of 1.4240, inversely dollar index, which is technically on intermediate uptrend and even has managed to close on higher end at 77.36 highest closing in about 8 months, can set to conquer 79 level in short term.

This can lead smart rally in Dow Jones index till 11890 to 11970 levels but the other markets like India, Dubai and even European markets may not take positive cue from this rally since investors will prefer to invest in US dollar based markets with intention of dual gains in single investment form appreciating currency as well as appreciating markets. The similar ambience was appeared for last 2 years in emerging markets.

Commodities can also cough a bit in this week as oil poised to lose firmly held ground after hurricane Gustav and Hanna. The risk premium will reduce either after the strike or failure. I feel even if they hit, production demand is not at the higher side to trigger great spikes. They can only find speculators who have built in for event unload disappointedly.
If they end without hitting any oil platforms, then speculators will UN wind in hurry later oil can break 112$ and test supports at 108$ and 102$.

Gold, silver unwind till there panic lows at 775$ and 12.2$ respectively to complete consolidation as appeal reduces for safe heaven instruments during dollar carnival.

The coming week can be very crucial and you may see many markets across globe to be sold off, even technical on charts are also indicating similar patterns being formed. (The author is CEO of Safe Trade Advisors Bangalore, www.safetradeadvisors.com)