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- Clearly we are seeing a relatively greater sense of calm with Europe with markets focusing largely on the US fiscal cliff issue. Nevertheless, the latest data releases out of the Euro Zone are not very encouraging so it shall not be long before it comes under the spotlight again.
- As expected, the US Congress took the first steps in resolving the Fiscal Cliff, however there are still important aspects to be addressed (subsidy and tax reform as well as spending cuts) in order to arrive at a comprehensive agreement.
- Another factor coming to the fore is the raising of the US debt ceiling, from the level set back in August 2011, and this is set to drive investor appetite for safe haven assets. The US debt ceiling reached USD 16,4 trillion at year-end 2012 and currently the US Treasury Department is taking “extraordinary measures”.
- Markets are becoming accustomed to authorities waiting until the last minute to take the required action. So with trading volumes rising now that the Christmas season is over, volatility affecting currencies and US treasury bonds should go up towards February, since decisions aimed at putting the US fiscal house in order should come about at the end of next month or early March.
- This went hand in hand with reported discussions at the latest FOMC meeting with regard to bond purchases for a shorter period than many were anticipating, since the ratings agencies are keeping an eagle eye on any progress which could be made with regard to the US fiscal situation. Consequently from here to the end of January we expect the 10-year US Treasury rate to pare back on the upswing seen over the last few weeks as it moves towards around 1.80%.
- Evidently Europe’s debt crisis has had a substantial impact on the region’s economy with unemployment at all-time highs, manufacturing still sluggish not to mention the scant supply of credit. While the EURUSD rate remains below the 1.3149 mark, this shall favor short positions in euros, which in turn would take the rate down to around 1.30.
- Although there are several factors suggesting the wisdom of holding open long positions in COP against the USD, the USDCOP rate dipped substantially at the end of last year, which is providing enough room for further corrections up to between COP 1,786 and COP 1,790, but remaining within a downward channel in the mid-term. Expectations of a further rate cut which would take the base rate down to 4% this month, as well as the overall external situation, are likely to drive up the local exchange rate from here to the end of the month.
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