FX: Fiscal Cliff Worries Will Keep Investors Nervous But...

  • FX: Fiscal Cliff Worries Will Keep Investors Nervous But...
  • EUR: Holding Strong!
  • GBP: Hit by Slower GDP Growth
  • Why NZD Fell Hard Despite Stronger Data
  • CAD: CPI Declines 0.2%
  • AUD: Oil Down 1.5%, Gold Up 0.5%
  • JPY Soars on Deleveraging


FX: Fiscal Cliff Worries Will Keep Investors Nervous But...


Currencies and equities sold off across the board after the House canceled its vote for Boehner's proposal to leave tax cuts in place for households earning up to $1 million.  The House Speaker's failure to gain support for his own party is a major setback in the Fiscal Cliff talks but considering the severity of the consequences and a likelihood of no deal this year, the sell-off the financial markets was relatively mild.  When the initial vote was canceled last night, stock futures fell sharply and while equities still ended the day down more than 1%, the sell-off could have been much steeper. The moderate slide tells us that investors are nervous but hopeful that politicians will find a way out of this mess. While there may only be 10 more days before tax cuts and spending programs automatically expire, there's also hope that the compressed time and high stakes will force Congress to reach an agreement in the spite of the possibility of being blamed for tax hikes.  Unfortunately we may have to wait until mid to late January before a deal is done because some Republicans are up for election in January and they will oppose anything that poses a challenge to securing their seats.  Falling off the cliff for a few weeks won't be the end of the world because the actual tax costs for Americans would be small, but currencies and equities could still extend their losses next week due to uncertainty and remain weak until there are signs of progress. 


Next week will be a shortened trading week due to the holidays and this means a light economic calendar with only jobless clams, Chicago PMI, consumer confidence and a variety of housing markets reports scheduled for release. None of these reports are expected to take the focus away from the Fiscal Cliff just as today's data failed to reverse the slide in equities and currencies.  Although the University of Michigan Consumer confidence survey was revised lower, personal income, personal spending and durable goods increased in November.  There has been more upside than downside in U.S. data, which will be important to remember once the dust settles.


EUR: Holding Strong!


The euro traded remarkably well today despite the sell-off in U.S. stocks and general sense of risk aversion in the financial markets.  The single currency did not completely escape the selling but it also did not fall as much as other major currencies.  In fact, next to USD/JPY, the EUR/USD experienced the smallest losses.  Considering that EUR is a risk currency many traders may be wondering why it is holding strong, especially since German consumer confidence fell for the first time since May to its lowest level in more than a year.  Mario Monti also officially resigned as the Prime Minister of Italy and is expected to hold a press conference on Sunday to lay out his plans for running in February.  One of the reasons why EUR/USD has held up so well is because concerns about the U.S. Fiscal Cliff have not taken a big toll on European stocks.  While U.S. stocks fell more than 1% today, European stocks including the DAX dropped less than 0.5% with Spain's IBEX index increasing.  European bond yields have also held steady with Spanish 10 year yields at 5.2% and Italian yields at 4.45%.  Investors are relieved that Europe is no longer the hotbed of uncertainty.  As a result some investors could be shifting their funds back to Europe.  With no German or Eurozone economic data on the calendar next week, the EUR/USD will trade on U.S. Fiscal Cliff headlines. 


GBP: Hit by Slower GDP Growth


The British pound ended the day lower against the U.S. dollar and euro on the back of weaker economic data and risk aversion.  GDP growth in the first quarter was revised down to 0.9% from 1.0%. The revision was caused mostly by lower consumer spending and investment lending, which is now estimated to have declined instead of increase in the third quarter.  Public spending growth was revised upwards but given the government's plans for greater austerity, this stimulus is not likely to be around for much longer. The downward revisions offset the uptick in total business investment and index of services.  Public Sector Finances also deteriorated in November with borrowing needs more than doubling as expenditures increase and corporate tax receipts declined. The only piece of positive data was the current account deficit, which shrank to -12.8B from -17.4B after hitting a record high in Q2. There's not much in the way of U.K. data next week.  The only reports due for release are housing market numbers including the Hometrack housing survey, BBA loan purchases and Nationwide House Prices.  No major surprises are expected from these reports as the housing market receives only limited support from the government's Funding for Lending Scheme.   


Why NZD Fell Hard Despite Stronger Data


The New Zealand dollar was hit hard by the breakdown in Fiscal Cliff talks.  It lost over 1% of its value against the U.S. dollar today, topping off a week that has led to nearly 3% in losses for the NZD/USD.  Both pieces of economic data from New Zealand was better than expected - net migration increased in the month of November and was revised higher in October while credit card spending rose 0.4% from 0.3% the previous month.  Yet the NZD/USD was the day's biggest loser and the reason why it has fallen the most is because it also rose the most over the past month.  The RBNZ's neutral monetary policy stance, 2.5% interest rates and a central bank with very little desire to intervene in its currency made the New Zealand dollar an extremely attractive yield and return play into year end.  Now that equities are selling off however as investors grow nervous about the U.S Fiscal Cliff, long NZD/USD trades are being reversed quickly. The Canadian and Australian dollars also fell sharply.  No economic data was released from Australia but weaker than expected data from Canada added pressure on the loonie.  While the Canadian economy expanded by 0.1% in the month of October, the annualized pace of growth increased less than expected.  Economists were also looking for consumer prices to hold steady but inflationary pressures eased with CPI falling 0.2%.  There's no data from the commodity producing countries next week, leaving fluctuations in those currencies entirely dependent on Fiscal Cliff talks and risk appetite.


JPY Soars on Deleveraging


The Japanese Yen traded higher as risk aversion drove investors back into the arms of safe haven currencies. While the decline in USD/JPY was modest (down less than 0.2%), other crosses such as NZD/JPY, GBP/JPY and CAD/JPY fell 1% or more.  No major economic reports released from Japan and the central bank left its overall assessment of the economy unchanged in their December monthly report.  This was the first steady reading in 5 months as the BoJ had downgraded its assessment every month for the past 4 months.  Despite concerns about exports, bright spots were seen in the consumer sector, which was validated by last night's supermarket sales report that showed the contraction in spending improving from to -2.6% from -4%. While it can be argued that the BoJ report and supermarket sales helped to lift the Yen, it is concerns about the U.S. Fiscal Cliff that has led to deleveraging and demand for the Yen.  Unlike many other countries with a lighter economic calendar next week, there are a number of important reports scheduled for release from Japan.  This includes small business confidence, housing starts, jobless rate, consumer prices, retail trade, industrial production and BoJ minutes. 

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