USD – The dollar is generally weaker this morning, but its ranges against its major counterparts are becoming increasingly narrow.  With no major economic data released today, investors are again focused on Washington’s ongoing fiscal debate.  The Obama Administration lobbied for $1.6T in new taxes, amongst other things, late last week, which was promptly dismissed by Republican leadership.  The GOP have since issued a counter-proposal that includes tax reforms, further cuts to Medicare and other spending reductions worth $2.2T over the next ten years. The plan was quickly shot down by the White House.  However, there are certain cuts that both parties can agree on, such as direct payment subsidies to farmers covering a select few crops – a holdover measure from the days of the Great Depression. The cut would save the government an estimated $46B over the next decade.  A hike in the gas tax is also garnering bipartisan consideration with the government currently plugging a $50B/year shortfall with direct subsidies to states to build and repair infrastructure.  Investors will be paying close attention when President Obama addresses the media later this morning.  In the meantime, the dollar has extended its slow decline against most of its peers.

EUR – The euro is higher for a fifth consecutive day as EU ministers convene in Brussels to discuss the regional debt crisis. Optimism is high that policymakers will build on recent progress made towards backstopping EU economies after officials said they were encouraged by the recently announced Greek bond buy-back program.  The announcement has helped narrow the bond-yield gap further between periphery and core debt with both Italian and Spanish debt yields extending their recent declines.  However, Spanish Economy Minister Luis de Guindos told reporters this morning that discussing the establishment of a European banking union is most important to him.  It is unlikely that policymakers from Germany, the Netherlands, Austria and possibly France feel the same way. Nevertheless, the common currency remains well supported as the primary alternative to the USD with investors growing tired of the “fiscal cliff” negotiations in the US. 

GBP – Sterling consolidated overnight against both the USD and EUR, but remains the top performing G4 currency over the past 12 months.  Despite signs that the British economy may be headed for another recession, options data shows that premiums on structures to sell the GBP vs. the USD have fallen to the least since 2009.  This comes even after the BoE flooded the market with an extra £375B in the last three years to buy UK government bonds.  However, further gains may be limited as investors await a key BoE meeting scheduled for this Thursday at which they will be looking for any guidance on future monetary policy. 

JPY – The yen rallied overnight, reaching a fresh weekly high against both the USD and EUR as investors move out of riskier assets.  The move in the yen is also largely reflective of technically driven trading as it has now broken back below a key level on the relative strength index that signals a currency is oversold.  However, with no new major economic data today to drive the market either way, further consolidation is to be expected.

Commodity Currencies – The commodity linked currencies are generally higher this morning, led by gains in the CAD and AUD.  The CAD rose after the BoC left interest rates on hold at 1%, and Governor Carney kept his bias to raise interest rates in 2013.  However, gains against the USD have been modest as the future monetary policy picture is clouded with Carney set to leave in July for the top post at the Bank of England. On the opposite end of the spectrum, the AUD is surprisingly stronger after the RBA cut interest rates to match a 50-Yr low of 3.0%.  In his accompanying statements, RBA Governor Stevens cited the persistent strength of the Aussie as partial impetus for the rate cut, but with most G10 interest rates near flat, 3% remains quite attractive.

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