- USD traded higher against the majors as concerns US budget negotiations will not land an agreement by the New Year.
- EUR weakened against the USD as fiscal cliff concerns had risk averse investors fleeing to safer assets.
- Commodity currencies dropped significantly as gold prices edged higher and riskier assets took dipped lower.
USD – The dollar firmed today after US budget negotiations took a turn for the worse, adding concerns the world's largest economy could slide into recession. For the time being - or at least the 11 days until the automatic tax hikes and spending cuts are triggered - the House is in shambles with no deal to avert the fiscal cliff in sight. In the past week, House Speaker John Boehner tried to introduce "Plan B" to address the budget deficit, which had a relatively small tax increase on millionaires and billionaires, and failed. President Barack Obama and the Democrats who control the Senate did not agree on the proposed compromise as they held an opposite view – that tax hikes on the wealthy are a condition for supporting the fiscal cliff bill. While the House is in recess during Christmas break, Boehner must decide whether to move further in Obama's direction and agree to tax increases much higher than his own proposal. Domestically, US incomes climbed 0.6% in November, the most since February, after a 0.1% increase the prior month. Consumer spending also climbed in November as Americans pushed aside the threat of higher taxes next year, ramping up their shopping for the holiday season. Purchases increased 0.4% last month after a 0.1% drop in October. Demand for goods such as machinery and electronics climbed more than forecasted in November, suggesting US companies are planning to expand further in the new year. Meanwhile, orders for durable goods increased 0.7% last month after a 1.1% gain in October that was larger than previously estimated. On the other hand, consumer sentiment for December fell to 72.9 from 82.7 in the previous month, falling behind the expectation of 75.0.
EUR – The euro weakened against the dollar and extended losses to its weekly lows as strong US consumer spending, personal income, and a rise in durable goods orders failed to boost investors risk appetite. Comments from EC Vice President Olli Rehn allowed for a minor uptick, after he announced that further French budget cuts were not necessary. French Prime Minister Hollande announced that the unemployment rate will continue to rise, affecting overall consumer spending in the country. Consumer confidence in Germany dropped to a yearly low of 5.6 from 5.8 in December, as German shoppers became increasingly wary of the effect the Eurozone debt crisis is having on Europe’s largest economy. The German Finance Ministry reported that it expects a rebound after the first quarter of next year. However, December’s consumer confidence data in Germany proves otherwise. Investors are awaiting the Eurozone Trade Balance report in January to gauge the difference between imports and exports of Eurozone goods and services. This should provide valuable insight into the pressures on the value of the Euro. Expect the euro to trade within its weekly range heading into the New Year.
GBP – The pound fell the most in six weeks against the US dollar after reports showed Britain’s economy grew less than previously estimated in the third quarter, and the budget deficit unexpectedly widened last month. The decline was further driven by risk aversion stemming from developments in US fiscal negotiations. Issues in the euro region may have improved, but the crisis is not over, and investors seeking safe haven currency have pushed the pound higher this year even as the central bank printed cash to increase bond purchases to 375 billion pounds ($ 608 billion), a move that usually debases a currency. A rising pound shows the challenges Mark Carney, who takes over from BoE Governor Mervyn King in July, will face as he tries to boost an economy weighed down by recession in the Eurozone. While GBP remains close to Wednesday’s high, movement above 1.6300 is likely to be limited given the considerable amount of resistance above this level.
JPY – The yen strengthened against the USD, pulling away from 20-month lows, despite weaker trade data and expectations the BoJ will have a more aggressive monetary easing policy ahead. Prime Minister Abe’s hope is that the central bank will agree to the 2% inflation target, which goes against BoJ Governor Shirakawa’s belief that a flexible inflation target is ideal. The continuous clash among the two parties is expected to continue until incoming governor takes office, in April.
Commodity Currencies – Commodity currencies dropped significantly against the USD, as investors fear the US will miss the deadline to come to an agreement on the budget deficit. The price of crude is down 1.56% to $88.50 while gold prices jumped 0.65% to $1,658.26. The Australian dollar fell to its lowest since Dec. 4 against the USD, while the New Zealand dollar dropped 1.1%. The Canadian dollar hit a two-week low against the USD after data showed Canada's annual inflation rate fell to a three-year low in November. Inflation came in at 0.8%, weaker than analysts had expected and far below the BoC's 2.0% target, meaning the central bank is under no pressure to raise interest rates any time soon.
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