- USD is weaker against most major currencies as investors demand for higher yielding assets.
- EUR traded near a 7-1/2 month high on improved market sentiment and increased demand for European debt.
- JPY slid further as the LDP looks to reshape the BoJ next year.
USD - The US dollar weakened against most major currencies with the exception of the Japanese yen as progress to avert the "fiscal cliff" improved investor sentiment. Meanwhile, the S&P 500 ended at its highest level in almost two months yesterday on rising hopes that negotiations over the US debt reduction were making advancements on a deal that could be reached in days. The differences over how to resolve the "fiscal cliff" narrowed drastically as President Barack Obama made a counter-offer to Republican House of Representatives Speaker John Boehner which included a major change in the position on tax hikes for the wealthy. The White House proposed leaving lower tax rates in place for everyone except those earning $400,000 and above, up from the $250,000 threshold the president has been demanding for months. Obama also moved closer to Boehner on the proportion of a ten-year deficit reduction package that should come from increased revenue, as opposed to cuts in government spending. Obama and Boehner remained apart on the issue of how and when to raise the government debt ceiling to permit the government to borrow more money. It was clear that yesterday's offer was not by any means the final one, but both parties said they were optimistic that an agreement was shaping up. And as market sentiment rose during these talks, many investors scaled back from safe haven assets like the US dollar.
EUR - The euro traded near a 7-1/2 month high against the US dollar on improved investor demand for euro zone assets. The improvement in market sentiment lifted the euro and also boosted demand for European shares while pushing Spanish and Italian bond yields lower. Spanish and Italian government bonds rallied in thin trade this morning as progress in US budget talks and the absence of any negative domestic headlines lifted investors demand for higher-yielding assets. Spanish debt extended gains after its final sale of the year raised more than the targeted amount. Meanwhile, Italian yields moved back below levels seen before Prime Minister Mario Monti, who sparked a wave of selling after announcing he would be resigning early. However, investors have since bought back into Italy on the view that any successor government will remain committed to Monti's reform agenda. Increased sentiment is supported on the back of hopes for a "fiscal cliff" resolution, and the rebalancing of portfolios by many European investors who favor European assets this year end.
GBP - The pound is positive against the dollar, trading close to its two-month high. The release of CPI data today was unchanged at 2.7% y/y, as expected. The CPI data measures consumer prices inflation, where the fastest price rises were in the cost of fruit, bread, and cereals. Retail prices index (RPI) inflation fell to 3% from 3.2% in October. The focus for the pound this week will be tomorrow's outlook for monetary policy, as investors anticipate the BOE's Monetary Policy Committee's (MPC) meeting minutes. In recent meetings, MPC members have resisted increasing QE. Expect the pound to remain in its ranges until the release of the MPC meeting minutes tomorrow.
JPY - Japan's incoming Prime Minister Shinto Abe backed the central bank when it raised interest rates in 2006; a move he now says was a mistake. His shift may signal less tolerance for deflation in the third-largest economy. Abe, whose party swept to victory in elections for the lower house of Parliament two days ago, will have the chance to reshape the BoJ next year, when the terms of its governor and two deputies expire. Abe said he told central bank Governor Masaaki Shirakawa today that he wants an accord with a 2% inflation target. The BoJ is forecast to boost its asset purchases as soon as Dec. 20. The yen weakened 0.2%to 84.01 per dollar in Asian markets after touching a 20-month low yesterday on the likelihood of more easing.
Commodity Currencies - Commodity currencies held their ground against the US dollar on increased demand for global commodities. Oil, copper and gold firmed on the prospect of progress in the US budget talks, which reduced worries about the slow growing global economy. Crude surged 0.8% to $87.85 a barrel and gold added 0.3% to $1,702.01 an ounce. Meanwhile, the sale of iron ore, a key Australian resource to the Chinese industrial expansion, bounced back to its highest point in five months, supporting the Aussie dollar despite RBA's rate cut earlier this month. The Canadian dollar also firmed on crude's rally near its highest in almost two weeks.