According to HSBC team, the problem is that with the selling of both the EUR and the USD, this requires large-scale buying of other currencies and assets. "This would help explain the compression in yields in the EM world". It would explain why cable is so high despite a deteriorating economic back drop and why the AUD is near 1.04 despite rate cuts, a Chinese slowdown and a fall in commodity prices. "In fact it is very unusual to see both the JPY and AUD appreciate against the USD. One is supposed to be 'risk off' with the other 'risk on'".
"It appears that both the eurozone crisis and the US fiscal cliff are kicking in simultaneously. This is seeing a move into, and a consequent appreciation of, other liquid G10 currencies such as. GBP, AUD, SEK, NOK and longer term EM fixed income assets", they explain. "This may just be a one week wonder but if this theme extends then compression of yields and diversification out of the two ugly sisters (EUR and USD) will be a new invidious theme".