Euro finds new reason to rally

True to form, the euro continued to defy gravity overnight with price action making a sustained break through $US1.32 to highs not seen since May. While the recently in-form Aussie and Kiwi dollar’s continued a consolidative phase, the euro forged higher alongside stronger US equity markets, which found solace in signs of fiscal cliff progress.

Concessions to original thresholds relating to the tax hikes appear to be found with President Obama lifting the bracket for tax increases for the wealthiest Americans from $250,000 to $400,000. House speak John Boehner is now expected to push for spending cuts to the value of $1 trillion over a 10-year period. While it’s apparent there’s still some common ground yet to be discovered, markets appear to be somewhat encouraged in the way negotiations are heading.

Equity markets responded in kind and the greenback continued to weaken with the Euro leading a move higher. The exception to the rule was the commodity bloc with the Kiwi, Aussie and CAD consolidating recent gains. The euro’s recent run higher appears to be attracting the attention of momentum traders with each break of key resistance acting to squeeze short players which has encouraged further upside. The Euro also continued its northern trajectory against the Yen with the pair breaking the Y111 region overnight, and in recent minutes edged slightly over highs of 111.43 set in March. The pair is now up over 10 percent since Yoshihko Noda announced his intention to dissolve parliament in mid November.

Japan’s Abe puts BOJ on notice

Still brimming with confidence in the wake of his decisive election win, Japan’s Liberal Democratic leader Shinzo Abe wasted little time in launching the first phase of his pro-stimulus agenda. True to his campaign theme, Abe has called on the Bank of Japan to begin a new stimulus agenda as soon as the conclusion of their two-day meeting this Thursday.

In addition to his push for grand monetary stimulus, Abe’s Liberal Democratic Party are spruiking pipelined fiscal initiatives, with as much as Y200 Trillion expected hurled towards infrastructure projects over the next decade.

With a passing glance at Japan’s bottom line it’s not too hard to see Japan’s economic fundamentals are rather uninspiring. Among advanced and emerging economies, Japan is the undisputed champion of the debt race, with current estimates showing the public debt equating to an alarming 235 percent of GDP and projected to rise to 250 percent by 2017. It’s also important to point out; much of Japan’s debt is owned by the people, which are aging population for reasons of longevity and declining birth rates. This of course implies Japan’s method of raising capital is unsustainable as citizens reach retirement age.

With a an already ambitious inflation target of 1-percent expected to doubled, Abe’s modus operandi is clear; kick start inflation and assassinate the Yen. By doing so Japan’s export-contingent economy stands to benefit from the increased competitiveness of a weaker currency. Time will tell if the Bank of Japan will cooperate with Abe’s objectives, but with current Governor Masaaki Shirakawa’s term expiring in April of 2013, one can expect a pro-stimulus ally to take the helm.

The Yen continued to weaken overnight with the USDJPY making another break to the upside of 84-figure, ahead of Thursday BoJ policy decision which is expected to see the bank add a further Y5-10 Trillion to its total asset purchase program of 91-trillion. At the time of writing the greenback is buying 84.15 Yen.

Aussie dollar edges lower

The Kiwi, CAD and Aussie hit the wall overnight with strength from US equities encouraging little in the way of upside momentum. Still, support for the local unit kicked in around the 105.15 US cent region, and we anticipate more side-ways moves rather than any convincing moves towards year end. The Aussie’s fortunes against the Yen have been far more progressive with moderate upside overnight after a period of consolidation. At the time of writing the local unit is 84.23 Yen and 105.25 US cents.

Yesterday’s release of the RBA minutes also failed to inject some life into the local unit. While flagging potential headwinds abroad, namely the US fiscal cliff, there were some bright spots littered throughout the minutes. The minutes acknowledged tentative signs of improvements from both sides of the Atlantic while reiterating conditions in China appeared to be stabilising. Nevertheless, with inflation expected to remain on trend in light of softening labour conditions, the board were afforded the necessary breathing space to err on the side of caution. However, the minute’s show the board’s decision was a closer call than many had anticipated, with the final paragraph showing the board considered waiting for further information to be made available. Given the board won’t reconvene until February next year; we consider this rate cut as a form of insurance. Interbank cash rate futures currently imply a 63 percent change of a further 25bps cut to interest rates when the bank reconvenes in February – unchanged from before the release of the minutes.