USD – The dollar consolidated within its recent ranges overnight as markets turn choppy ahead of the Thanksgiving holiday this Thursday. Investors remain encouraged by yesterday’s comments from the Obama administration and congressional leaders that they are confident a deal on the so-called “fiscal cliff” will be reached before the December 31st deadline. However, actions speak louder than words in this case with little concrete progress leaving investors largely in a wait-and-see mode today. Data has been supportive with both housing starts and building permits coming in better than expected at 894K and 866K respectively, but the uptick may prove temporary with the possible elimination of several key tax deductions being floated on Capitol Hill. Nevertheless, housing starts reached a four-year best in October, suggesting that the housing recovery is gaining steam. Investors will be paying close attention to Fed Chairman Bernanke’s speech before the Economic Club of NY due later this afternoon, with particular interest in possible guidance on future monetary policy and the Fed’s view on the fiscal cliff.
EUR – The euro has extended its gains against many of its counterparts this morning despite trading through a particularly volatile overnight session. Optimism over progress towards easing conditions on Greece’s various bailout packages and possibly extending further financial aid to the embattled nation has largely outweighed a cut to France’s credit rating. Regional policymakers gathered in Brussels ahead of a two-day Eurozone summit with an agenda of addressing Greece’s missed deficit-cutting goals. Rumors are that the nation’s international creditors are mulling over a possible extension of outstanding debt while also reducing the interest rates charged on bailout funds. However, the IMF remains the wildcard in the negotiations after the international fund threatened to walk away from the table as recently as last week. The organization is facing increased pressure from its international creditors, mostly in Asia, to stand fast on agreed upon parameters rather than affording Europe “preferential leniency.” Meanwhile, Moody’s Investor Services stripped France of its top Aaa credit rating overnight, dropping it to Aa1 in light of a worsening growth outlook. However, the impact on the euro has been limited as S&P cut the nation’s rating earlier this year. French government assets have actually strengthened from then with the spread between French and German 10-Yr bonds narrowing to 0.75% from 1.50% at the beginning of the year.
GBP – Sterling is marginally higher against both the EUR and USD this morning as the French credit rating downgrade prompts investors to seek the relative safety of British assets. Despite the economy likely heading back into recession before the end of the year, investors remain attracted to the pound as an alternative to the EUR. Investors will be paying close attention to tomorrow’s BoE’s meeting minutes, looking for hints of further quantitative easing before year end.
JPY – The yen reversed an initial rally against the USD and EUR as growing optimism over progress being made on the “fiscal cliff” and Eurozone debt crisis outweighed central bank commentary. Current BoJ Governor Shirakawa told reporters that opposition leader Shinzo Abe’s recent proposals to weaken the yen are unrealistic. However, with Shirakawa’s term coming to an end in April, and with the next Governor likely to be of a more dovish stance, investors suspect the yen will weaken further in the months ahead.
Commodity Currencies – The commodity linked currencies are marginally lower this morning as raw good prices are generally in the red. The CAD pared some of its recent gains against the dollar as the price of oil – Canada’s main export – declined. The AUD is also lower after RBA governor Stevens told reporters that he deems it prudent to have kept the nation’s benchmark interest rate unchanged “for the moment” thus prompting investors to suspect more further monetary easing in the near term.
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