US Congress approves deal to avoid “fiscal cliff,” creating a risk appetite.

JPY hit an 18-month low on continued BoJ plans for further monetary easing.

Commodity currencies traded higher on a risk positive tone after US last minute bill.

 

USD- The US dollar broadly weakened after U.S. lawmakers approved a last-minute deal undoing income-tax increases, helping avoid the “fiscal cliff” and eroding demand for safe haven currencies.  The passage of the bill removed a major uncertainty hanging over markets in the near term. The focus now moves away from Washington D.C. and goes back to economic data where optimism could fade if U.S. economic data later this week disappoints. The market needs to see supporting data that growth is still intact.  The Institute for Supply Management is set to release its manufacturing data for December later today, the ISM services data is due on Friday, as well as government payrolls data for last month.  Overall, the market reaction seems to be a classic risk-positive move.

 

EUR- The euro strengthened against the US dollar, not far from the 8-1/2 month high hit on Dec. 19. The single currency is benefiting from an overall risk-positive tone in the market as the US congress approved a last minute deal to avoid the fiscal cliff.  Further gains in the euro, however, could be limited if concerns about the euro zone economy reemerge.  A business survey showed the slowdown in euro zone factory activity deepened in December as new orders tumbled, suggesting the economy may have slipped further into recession in the last quarter of 2012. Germany, Europe's largest economy, saw its manufacturing sector shrink for the 10th straight month and at a faster pace than in November, while French data showed a decline in all but one of the past 17 months. The slump in Spain also deepened last month, while Italy's index remained below 50 for the 17th month.

 

GBP- Sterling rose to a 16-month high versus the US dollar, the strongest level since Aug. 30, 2011, after the U.S. budget deal.  The pound managed to stay at its high after a report showed U.K. manufacturing expanded for the first time in eight months in December. A gauge of factory activity climbed to 51.4 from a revised 49.2 in November.  It is the first time since April 2012 the index has been above the 50 level which indicates growth.

 

JPY- The Japanese yen weakened against the US dollar, trading in ranges of 87.00, the lowest in 18 months, as U.S. lawmakers approved a last minute deal to avoid a package of tax hikes and spending cuts.  Increased investor appetite caused by the budget deal added pressure on the yen, which was hurt by expectations a new Japanese Government led by Prime Minister Shinzo Abe will push the Bank of Japan into more forceful monetary easing to beat deflation.   If the BOJ signals less appetite for more aggressive quantitative easing at its meeting in late January, despite continuing political pressure and following the measures announced in December, the move could prove to be disappointing to markets. 

 

Commodity Currencies- Commodity-linked currencies are broadly higher after U.S. lawmakers approved a last minute deal to avoid the so-called “fiscal cliff,” creating risk appetite in the market. The Australian and New Zealand dollars rallied.  New Zealand’s dollar led all gainers, touching its highest level in two weeks. The Australian dollar appreciated 1.1 percent, the most since June 29. The Canadian dollar also rose the most in three months against its U.S. counterpart and the majority of its most-traded peers with the passing of a deficit-reduction plan to avoid automatic austerity and head off the threat of recession in the nation’s largest trading partner. Crude oil, Canada’s largest export, also rose for a second day.

 

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