USD remains mixed as fiscal cliff stalemate continues.
JPY falls to 2-year lows as PM Abe takes office.
Weak UK Data may question GBP safe-haven status.
USD – The US dollar remains mixed as markets await the outcome of fiscal cliff negotiations and US lawmakers return to Washington to renew talks. Traders are uncertain how markets will react if no deal is struck before year-end and massive tax hikes roll out as well as huge spending cuts to government programs. However, hope remains for a deal by the New Year.
EUR – The euro extended gains to breach a 17-month high against the yen as speculators and investors sold the Japanese currency on expectations of further aggressive monetary easing by the Bank of Japan.
The euro continues to climb higher against the dollar trading nearly 0.50% higher amid waning concerns about the Eurozone debt crisis coupled with fiscal cliff concerns out of the US.
GBP – The beleaguered pound dropped to an 8-month low against the euro as UK economic concerns continued while the euro benefited from ebbing Eurozone debt worries and year-end demand. Throughout 2012 the pound has been benefitting from safe-haven flows due to Eurozone concerns. However, recent fundamental data from the UK could call the safe-haven status into question and we may see a reversal of flows in 2013. Domestic data last week revealed weaker-than-expected retail sales, a rise in public borrowing, and a sharp fall in December consumer confidence, adding to concerns that the economic situation could deteriorate in the coming months. Despite the UK's stubbornly high inflation, poor economic fundamentals have led to speculation the BoE will likely resort to more QE in the early part of the New Year in an effort to steer the economy away from further dips into recession.
JPY – The yen dropped to a two year low vs. the USD as Prime Minister Abe stands by his commitment for a 2% inflationary target and revealed a cabinet with similar ideas; on board for an aggressive monetary policy by the BoJ. With his promise to do away with deflation and weaken the yen to make Japanese exports more competitive, Abe stated that if needed, he would revise a law guaranteeing the BoJ independence if it refuses to set a 2 % inflation target. As a result, the market’s response was quite significant, trading in ranges of 85.92. For the year, the yen has fallen 10 ½ %, its biggest annual drop since 2005.
Commodity Currencies – The Aussie and New Zealand dollars are weaker against the USD, near one-month lows, due to year-end technical trading as investors squared up long positions. Gains in iron ore and copper prices failed to reverse the subdued mood. The commodity based currencies did remain at multi-year peaks against the yen.
Despite being closed for the past two days due to Christmas holidays, the Canadian dollar was largely unchanged against its US counterpart in quiet trading as investors wait for developments in the U.S. budget talks to avert a fiscal cliff and square positions ahead of the year-end.
For more market reports go to Union Bank of California