USD – The US dollar traded higher against most major currencies with the exception of the AUD and NZD, despite the uncertainty over any concrete decisions regarding the expiring tax cuts and the across-the-board government spending cuts scheduled to become effective Dec. 31, 2012. President Barack Obama said there could be a quick deal to avert the "fiscal cliff". This deal involving tax hikes and spending cuts are set to begin next year, if Republican leaders agree to raise tax rates for those making above $250,000 a year. Meanwhile, markets are focusing on Friday's nonfarm payroll, where economists expect the US to have added 93,000 jobs last month. If that prediction pans out, it would be the fewest number of jobs in five months, which economists blame the anticipated pull-back from Hurricane Sandy in October. While expectations of a bounce-back in December is predicted, as we approach the holiday season, the pace of job growth is expected to remain languid given the economic uncertainty created by the so-called fiscal cliff. None the less, temporary employment in construction payrolls will probably get a boost from storm-related clean-up and rebuilding efforts. Also, a rise in homebuilding suggests an increase in construction jobs in the beginning of the year. Currently, the US unemployment rate is holding steady at 7.9%.
EUR – The EUR slid further against the USD after the ECB held interest rates at a record low of 0.75%, leaving investors to shift their attention to comments left at a news conference after the meeting by ECB President Mario Draghi, for new clues that may suggest any cuts next year. Draghi and the policymaking Council held a wide discussion on interest rates before opting to leave them on hold. The ECB even pondered the idea of a negative deposit rate, where Draghi responded, "We briefly touched upon the complexities that such a measure would involve possibly unintended consequences, but we didn't elaborate any further". Overall, comments by the ECB were fairly dovish on the outlook for rates as they predicted the Eurozone economy would shrink further in 2013, leaving the door open to a possible reduction in borrowing costs early next year. Meanwhile, the bank's new projection on GDP put a growth of just 0.3% for 2013, sharply lower than the predicted growth of 2.1% back in September, suggesting further contraction as a likely outcome.
GBP – The British pound is flat and trading in narrow ranges against the dollar. The BOE left monetary policy unchanged, deciding not to inject more liquidity in Britain’s sluggish economy. As a result, bank rates will continue to remain at a record low of 0.5%. Market participants are looking forward to tomorrow’s release of industrial production and manufacturing data, in hopes for a recovery from previous months. Expect the pound to continue trading within its weekly ranges, as current economic reports remain unchanged.
JPY – The Japanese yen strengthened as investor sought safer assets but maintains trading in narrow ranges. The impact of headline risks arising from political rhetoric appears to have weakened, but remains one of the key drivers in the current environment. USD/JPY technicals have suggested that the rally was excessive in November, and have since moderated amid the recent consolidation. The key for yen direction going forward will be whether those expectations of further aggressive easing from the BoJ are met.
Commodity Currencies – The commodity linked currencies are mixed this morning against the dollar. The AUD is positive against the dollar with the release of stronger than expected employment data which rose 13.9K in November, suggesting a bullish market outlook in the near-term. Technical indicators suggest that the AUD will remain well supported through year-end. The CAD remained flat this morning and is trading within its recent ranges. The release of Canada’s PMI data showed a decline from 58.3 in the previous month to 46.4. November PMI data, which was the lowest reading in over a year, suggests that economic weakness has carried over into the fourth quarter. Near-term risks lie with the release of tomorrow’s employment data. The MXN continues to remain at the top of its recent ranges as investors are looking forward to the release of tomorrow’s inflation data. Moreover, low volatility rates for the MXN will continue to remain as the election of incoming President Pena Nieto suggest a positive outlook for the emerging economy.
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