USD – The dollar is higher against nearly all of its major counterparts this morning as President Obama meets with Congressional leaders to discuss the so-called “fiscal cliff.”  However, with a Republican held House and a Democratic majority in the Senate, investors are expecting negotiations to be contentious.  While both sides of the aisle have made it clear that they hope to avoid triggering automatic tax hikes and spending cuts scheduled for early 2013, policymakers are still far apart on several points of contention.  The Republicans hope to extend Bush-era tax cuts, while the Democrats are pushing to let them expire for top earners in order to boost government revenues. Meanwhile, the Democrats are urging their Republican counterparts to agree to raise the debt ceiling from its current $16.4T before it’s met early next year.  With time ticking down, investors are fearful that a deal will not be met, spending cuts will kick in, and the economy will slip back into recession.  Reaffirming these fears, industrial production data released this morning unexpectedly contracted by 0.4% after a 0.2% gain in the previous reading. Although seemingly counterintuitive, the situation is providing support for the USD this morning as investors continue to view it as a relatively safe and stable asset. 

EUR – The euro is back towards the bottom of its recent ranges this morning as investors account for yesterday’s dismal regional GDP report.  The country break down was surprising with export-led Germany, Belgium and the Netherlands all coming in weaker than anticipated while domestically-driven France, Italy and Spain proved a bit stronger.  However, with forward looking indicators suggesting further declines are ahead, most are not encouraged by the modest improvement in the periphery. Nevertheless, Eurozone policymakers continue to talk up stability in the region and its assets.  Speaking at a conference in Moscow, German Chancellor Merkel told the audience that the euro has “proven itself to be a very stable currency” and that they “can trust we will do everything to make the future of the European Union successful.”  Meanwhile, Banque de France Governor Christian Noyer is encouraged by progress in Spain telling reporters that he has “the impression that the necessary measures have been taken [in Spain] and I still hope that as it is in the underlying scenario of the ECB the Eurozone economy will progressively recover in the course of the next year.” 

GBP – Sterling is mixed this morning, falling against the USD, but rebounding from a two-week low against the EUR.  While the outlook for economic growth in the UK is rather modest, it is better than that of mainland Europe.  As such, investors are betting that this week’s declines against the EUR have been overdone.  Nonetheless, the pound has extended its declines against the “safe-haven” USD after yesterday’s disappointing British retail sales report.

JPY – The yen extended its weekly declines against the USD to nearly 3% as Japanese politicians continued with the recent interventionist rhetoric.  However, the yen’s declines are still surprising given that an election was already widely anticipated.  The move likely reflects the yen’s weakening position as a “safe-haven” asset with Japan’s fiscal position deteriorating significantly over the past twelve months. While negative developments in the Eurozone or with regard to the US fiscal cliff could provide a bit of support for the yen in the short term, it appears that a retest of its yearly lows near the 84 handle may be in store in the medium to longer term.

Commodity Currencies – The commodity linked currencies are generally lower this morning as investors look for safer assets.  The CAD edged lower in early trading, but volatility remains modest. In fact, the loonie has traded in the narrowest range against the dollar this week in more than 16 years, making option contracts historically cheap. The AUD slipped to a three-week low as investor risk appetite wanes after stocks fell around the globe overnight.  Yesterday’s announcement that the RBA sold more than $500mm worth of AUD last month has also weighed on the Aussie as investors suspect more intervention could be forthcoming.


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