USD – The dollar begins the week on the defensive as optimism builds that lawmakers are nearing a deal on the so‐called “fiscal cliff,” thus crimping demand for its relative safety. Stocks and commodities are staging a relief rally this morning as the risk‐on trade gains momentum, prompting investors to seek higher yields elsewhere. Early Monday, President Obama told reporters that he was “confident” that an agreement would be met to avert triggering automatic spending cuts and the end to current tax breaks that would likely send the economy back into recession. Meanwhile, data released this morning has encouraged investors further with existing home sales topping estimates at 4.79M versus expectations of 4.74M. Investors will also take note of forward looking housing data on Tuesday with housing starts and building permits both due. However, gains could slow in the coming months with one of the compromises being floated by Republicans on Capitol Hill to cap or remove certain tax deductions, including the current home mortgage deduction. Attention will then turn to Wednesday’s early reading of weekly jobless claims number after last week’s unexpected spike above the key 400K threshold in the wake of Hurricane Sandy. Investors will also get the latest reading of U. of Michigan confidence and leading indicators on Wednesday ahead of the Thanksgiving holiday. With the shortened week and the improved optimism over a bipartisan deal, it can be expected that the dollar will give back a bit of its recent gains in the near term.
EUR – The euro is higher this morning, recovering from an eight‐week low touched against the dollar last Friday, as market sentiment is generally improved. Investors are encouraged by signs of progress on the restructuring of Greece’s various “bailout” terms as regional policy makers assemble in Brussels to discuss the embattled nation. Lengthened maturities on outstanding debt and lowered rates on the country’s foreign loans are the main options being discussed with the intent of bridging the funding gap. However, the sharp rise seen in the EUR/USD pair clearly shows that investors are discounting the IMF’s warnings that it could pull its support all together. Meanwhile, ECB member Joerg Asmussen told reporters that Greece will likely need further financial aid after 2014. However, while policymakers have pledged to do whatever it takes to keep Greece from exiting the currency bloc, key members are refusing to return to their parliaments to request further funding. Moreover, Tuesday’s Eurozone meeting is a precursor for a larger EU summit scheduled for the 22nd – 23rd to resolve the regional budget, a goal threatened by diverging policy views between mainland Europe, the UK and Scandinavia. Consequently, the EUR may encounter renewed resistance in the coming days as Greece’s debt woes again come into view.
GBP – Sterling is mixed, gaining against the USD while falling versus the EUR. While improved investor sentiment is providing a bit of support, signs of a growing divide amongst the UK and its EU counterparts are weighing on GBP vs. the EUR. With EU officials set to discuss the region’s budget to cover nearly €1T of spending, rumors are that Eurozone officials have begun working on a plan that does not include the UK. With little major economic data due out of Britain this week, the GBP’s direction will likely be dictated by developments at the EU summit and improving risk sentiment.
JPY – The JPY has pared some of its recent declines this morning, but still remains well entrenched above the key 80 handle versus the USD. After appreciating by more than 60% over the past five years, the yen slipped 2% last week, and further declines are expected after PM Noda called for December general elections. With the opposition LDP, led by former PM Shinzo Abe, expected to take control of the government, investors are anticipating increased pressure on the BoJ to pursue open‐ended quantitative easing. Moreover, BoJ governor Shirakawa will be stepping down in April after a five‐year term, with his replacement likely to be even more dovish should the LDP prevail.
Commodity Currencies – The commodity linked currencies are generally improved this morning as investor risk appetite returns. The CAD broke back below parity with the USD for the first time in more than a week as commodity prices rose. Investors are also encouraged by apparent progress on the “fiscal cliff,” with improved demand for Canadian exports providing support for the loonie. Similarly, the MXN has gained by more than half a percent against the dollar as emerging market stocks rose for the first day in eight as the risk‐on trade gained momentum. The AUD appears headed for a retest of its recent highs in the 1.05’s against the USD as investors are attracted to the Aussie’s G‐10 leading yields. However, gains may be limited as the RBA indirectly intervenes in currency markets. The RBA has sold $1.4B AUD over the past three months to a category of buyers that can include foreign central banks, at least partially easing the pressure for further appreciation.
RMB –USD/CNY finished stronger against the dollar with the fixing coming in at 6.2345, despite a weaker midpoint set at 6.2975 by the central bank. The level once again hit the top of the daily trading band with Chinese corporates selling dollars and ultimately rejecting the central bank’s level. Data shows that while foreign exchange assets of $3.8 trillion rose by $321 million in September, Chinese banks took on more than $20 billion worth of foreign currency creating a $32 billion trade surplus in the month of October. In the short term, expect for a stronger yuan as the market looks for further direction from the new Chinese administration coming on board in March 2013.
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