After weeks of quarrelling and bumping heads over a budget deal to avoid automatic spending cuts and tax hikes coming into effect, US lawmakers finally reached an 11th hour deal and averted falling over the ‘fiscal cliff’. The Senate and the US House of Representatives approved a Bill meant to avoid the consequences of the ‘fiscal cliff’. The Bill included the extension of unemployment benefits until the end of 2013 and tax increases for those individuals with larger than $400,000 income.
The Fed may be showing some optimism over the prospects for US economic growth- Emman Xuereb
The deal reached was met with initial euphoria by global investors as equity markets and riskier assets rallied across the board. US share prices soared to five-year highs and higher-yielding currencies like the Aussie surged higher across the board as investors celebrated the budget deal.
Yet, despite all the initial excitement this deal brought about and the fact it numbed growing concern of an imminent recession should lawmakers have failed to act, it merely bought Washington more time to tackle spending cut issues and debt ceiling discussions over the coming weeks.
The dollar, after falling close to an eight-month low against the euro, recovered and rose to a fresh three-week high versus the common currency by the end of last week. Forex investors booked profits on their long EUR/USD positions after the pair breached the 1.3300 mark, amid talk that the passage of the Bill to avoid the ‘fiscal cliff’, was not enough to end the political showdown on the budget, with battles over the US debt ceiling still to come in February.
EUR/USD fell to a three-week low by 1.2998 on Friday after the latest minutes from the Federal Reserve’s FOMC meeting released on Thursday of last week, revealed that some policymakers believe it will be appropriate to “slow or stop asset purchases well before the end of 2013.” This spooked investors as they grew cautious over an eventual termination of the bond buying programme prior to end 2013. On the positive side the Fed may be showing some optimism over the prospects for US economic growth.
Risk appetite recouped momentum on Friday, after the jobs report from the US showed signs of resilience in the labor market. Data showed employers in the United States added more jobs than expected as the change in non-farm payrolls rose 155,000 in December, slightly lower than the previous revised figure of 164,000 and against consensus for 153,000. The labour market fared relatively well in the midst of the fiscal budget talks, but the unemployment rate edged higher to 7.8 per cent nonetheless. This hinted that speculation of the Fed ending QE3 well before the end of 2013 was pre-mature at this stage and pushed riskier assets higher.
Risk sentiment was also lifted by a stronger than expected ISM non-manufacturing PMI reading and better than expected jobs report from Canada. EUR/USD bounced up to close the week at 1.3081 and rose to 1.3140 by Tuesday of this week. The single currency was also buoyed by speculation that the European Central Bank may refrain from signaling more interest rate cuts at its meeting scheduled for today.
Meanwhile, the Japanese yen bounced back from a two and a half year low versus the dollar at the start of the week. Forex investors trimmed some of their bearish bets against the yen and booked profits as they judged its recent fall as excessive.
By the time of writing, EUR/JPY fell to 114.48, edging away from its recent peak of 116.00, while USD/JPY dropped to 87.23 after it hit 88.41 on Friday. The single currency managed to hold on to some of its recent gains after Japanese Finance Minister Taro Aso said the government may buy bonds issued by the European Stability Mechanism (ESM) to help stabilise the region’s financial situation.
The Nipponese currency has been under tremendous pressure recently, dropping to an 18-month trough against the euro and to its lowest since July 2010 versus the greenback. In fact it is down just shy of 10 per cent against the US dollar since November 1, 2012 on expectations that the new Japanese government, led by Prime Minister Shinzo Abe, will exert more pressure on the Bank of Japan to pursue more forceful monetary easing.
Upcoming FX key events:
Today: US Consumer Confidence & US New Home Sales.
Tomorrow: French GDP, US Chicago PMI & US Pending Home Sales.
Technical key points:
EUR/USD is bullish, target 1.3500, key reversal point 1.2870.
EUR/GBP is bullish target 0.8220, key reversal point 0.7950.
USD/JPY is bullish, target 92.50, key reversal point 82.00.
GBP/USD is bullish, target 1.6600, key reversal point 1.5800.
USD/CHF is bearish, target 0.8900, key reversal point 0.9500.
AUD/USD is neutral.
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Emman Xuereb is a trader at RTFX Ltd.