USD – The dollar has given back overnight gains against many of its major counterparts, as stocks and commodity markets reverse early losses. Investors remain concerned with the political gridlock on Capitol Hill, but still remain generally upbeat that a deal will ultimately be reached. The economic schedule was rather light today in the US with new home sales registering in line with last month at 368K, but short of the expected gain to 390K. Investors will also take note of the Fed’s Beige Book regional activity report due later this afternoon with a more upbeat assessment widely expected. Nevertheless, the market continues to price in further monetary easing from the Fed with Operation Twist coming to an end next month. Chicago Fed President Evans told reporters this morning that he is eyeing an unemployment rate of 6.5% or better as the level to reach before the Fed would consider higher interest rates. Consequently, dollar gains will remain rather subdued in the near term as policymakers actively support the economy. Looking ahead, however, should Congress come to an agreement on extending the current tax cuts and raising the debt ceiling, the US economy is well placed to gather momentum in the coming year. This will likely provide substantial further support for the dollar as the US outperforms most of its G10 peers.
EUR – The euro pushed back towards the bottom of its weekly ranges against the dollar as Greece continues to dominate headlines in Europe. Despite growing popular opposition, German Finance Minister Schauble told lawmakers this week that Greece may need additional support. This could come as either additional funding for Greece through the ESM and/or as further reductions to the interest charged on outstanding loans. The note comes prior to a key German vote set for later this week on the latest proposed easing measures that would reduce Greece’s debt load to 124% of GDP by 2020, up from a previous goal of 120% in the same timeframe. Meanwhile, IMF officials are waiting for Greece to complete a debt buyback program, aimed at shaving 11% of the nation’s debt load, before agreeing to more lenient loan terms. However, ahead of the German vote and the Greek debt buyback, the common currency will likely remain range-bound in the near term.
GBP – Sterling is lower against both the USD and EUR this morning, albeit within its recent narrow ranges, after data released yesterday showed that the British economy continues to lag. Q3 GDP came in as expected at 1.0%, but policymakers continued to warn that the outlook for Q4 is not as positive. Consequently, the pound has edged lower as investors begin to price in further monetary easing from the BoE with the MPC next meeting on December 6th. BoE Deputy Governor Charles Bean told reporters today that the Bank has not ruled out further asset purchases and that they still see them as quite effective even if the impact is not as great as it was several years ago.
JPY – The yen strengthened to a one-week high against both the USD and EUR overnight as investors sought its relative safety. Despite continued interventionist rhetoric from Japanese policymakers the yen remains an investor favorite in times of heightened risk aversion. However, with technical indicators signaling that the yen is oversold, further modest gains can be expected.
Commodity Currencies – Despite lower commodity prices, the CAD, MXN and AUD are all modestly higher this morning. Oil fell to $86/bbl, gold slipped to $1713/oz, and copper dropped to $351/lb. The CAD reversed early declines on expectations that the US will avoid the “fiscal cliff.” Similarly, the MXN pulled back from its weekly lows on growing optimism. However, with no final deal yet reached, both the CAD and MXN are vulnerable to sharp news-driven swings in the near term. Meanwhile, the AUD is back towards the top of its recent ranges even ahead of a report that is expected to show that Australian business investment grew at a slower pace last month adding to the case for further interest cuts from the RBA.
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