USD is mixed as investors stand on edge over US fiscal cliff results.
JPY held in ranges of 86.00 as the BoJ plans for further monetary easing.
Commodity currencies traded flat as gold and crude oil prices slid lower.
USD – Global markets stand on edge and the dollar is mixed against most major currencies as US President Barack Obama and lawmakers were set to have a last round of talks before the New Year deadline. Markets are in fear that an absence of a deal to avoid massive tax hikes and spending cuts could drag the US economy and others around the world, back into recession. Obama and Vice President Joe Biden will meet congressional leaders from both parties today at 3 p.m. EST, to revive negotiations in order to avoid tax hikes and spending cuts worth $600 billion. At present, members from the Republican and Democratic parties have remained far apart, particularly over plans to increase taxes on the wealthiest Americans to help close the US budget deficit. The coming days are likely to see either intense bargaining over numbers, or political theater as each side attempts to avoid blame if a deal looks unlikely. Analysts say the dollar could benefit from safe-haven buying if no deal is reached by year-end. US dollar gains reached a two-week high against a basket of currencies, with its index DXY rising to 79.703.
EUR – The euro fell against the US dollar, as investors took profit on its recent gains while awaiting new developments in regards to the US budget talks before the weekend. Many analysts attribute the euro's drop to year-end dollar demands, saying the unwinding of long euro positions were weighing on the currency. Since mid-November, the EUR has made steep strides, gaining around 5% in a month to hit an 8-1/2 month high of $1.33085 on Dec. 19. The assumption that the Eurozone crisis is over is perhaps a bit overdone. Current EUR/USD movements suggest that many investors who have increased their long euro positions during the last three months may not have the appetite to carry these long positions into the next year.
GBP – Sterling recovered from a two-week low against the USD, as some investors booked profits before the year-end. Gains for the pound will likely be capped by uncertainty about UK’s economic recovery and expectations that the BoE may have to ease monetary policy early next year. For much of 2012, investors seeking to flee the Eurozone debt crisis headed for the perceived safety of UK gilts, which are liquid and triple-A rated. However, continued high inflation and poor growth in the UK may erode its value and make the investment less attractive. Britain is also struggling to meet its own targets on reducing its high debt as data last week revealed a rise in public borrowing, adding to worries that its rating could come under threat next year. Concerns the economy may deteriorate further in coming months, adds pressure on the BoE to ease monetary policy. Those factors are likely to weigh on sterling in the near term.
JPY – The Yen held steady against the USD, trading in ranges of 86.00 as Prime Minister Abe pressures the BoJ to take drastic measures to bring the nation’s deflation to an end. Understanding the need to face reality and the need to move quickly to avoid a future crisis, the BoJ is on track to pump 120 trillion yen ($1.4 trillion) into the economy. Abe stated that in next year’s election for a new BoJ governor, he will choose a successor whose views are closer to his, and aides say he may prefer someone with negotiation and management skills vs. an academic one. To date, the yen has fallen more than 12% against the dollar in 2012, its biggest annual percentage drop since 2005.
Commodity Currencies – Commodity-linked currencies are flat and will likely benefit if US budget negotiations meet their deadline. However, if debt talks remain unresolved, investments will highly flow into the highly liquid USD. Recent news that the House of Representatives were meeting on Sunday is seen as positive, but the purpose of the session remains unclear, leaving little reason to put on risk trades. The Canadian dollar was flat against its US counterpart after USD/CAD hit C$0.9959 yesterday, its weakest level since Nov. 28. The New Zealand and Australian dollars also traded flat after recovering from its recent sell-off during most of the week.
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