Sit tight until after the new year

Outlook:

We get Nov new home sales today, along with the usual weekly jobless claims and Conference Board December consumer confidence. Realistically, data doesn’t mean much with the fiscal cliff and debt ceiling looming, and the House not even meeting today. A last-minute deal is still possible but don’t hold your breath. We are a little annoyed that Monday, which is traditionally a half-day ahead of New Year’s, will go down to the wire. Our crystal ball is as cloudy as the next guy’s but on the whole, we do not expect a deal to get done. Ill-will and malice abound in Washington. Government is dysfunctional. If so, risk aversion should start affecting currencies any time now, such as a new downward move in the canary in the coalmine, the AUD. It may take a while longer to reach the euro, if at all, since flows are heavy out of yen into euros. Our best advice is to sit tight until after the new year. We are also thinking of removing the “eurozone sanity check” when we live in a glass house and can just as well prepare a “US sanity check.”

Eurozone Sanity Check: European Commission Pres Barroso proposed at end-November a process that could last as long as 5 years to create a true Treasury in the eurozone with taxing and borrowing authority. It is proposals like this that keep the magic in the euro, despite the eurozone economy diverging from the US and sliding into recession. Countries in recession “should” see their currencies fall.

The EMU sanity check:

• The eurozone is officially in recession, with Q3 GDP down 0.1% after -0.2% in Q2. The IMF predicts a 80% probability of eurozone recession in 2013. The European Commission say 2012 growth will be 0.4% and cut its eurozone growth forecast to 0.1% in 2013 from 1% in May. German growth was cut in half to 0.8% from 1.7%. France will contract by 1.4%. The OECD forecasts 2014 as a second full year of recession. On Dec 6, ECB chief Draghi said growth will be 0.3% in 2013 at best and -0.9% at worst.

• S&P cut Spain's rating two notches to triple-B-minus, one step over junk; Moody’s cut France’s rating by one notch to Aa1, leaving Finland as the only eurozone country with a Triple A rating. The Economist Magazine names France the ‘time-bomb at the heart of Europe” on labor market rigidity and loss of competitiveness.
  

• The EU banking supervisor will be established by year-end as planned, with the target banks now defined, but the EC communiqué of Dec 14 removes mention of a eurozone reform budget and economic reform contracts, putting them off to the June summit.

• Greece got a €20 billion debt swap and Bailout Two of €34.3 billion, avoiding “default” and thus an S&P ratings upgrade. PM Samaras says the crisis is over and “Grexit is dead.” Stay tuned.

• The European Commission said yesterday the baseline projection for total eurozone debt is a modest drop from 92.8% this year to 88.6% in 2020 and 86.3% in 2030. The WSJ says “Having been at 85.5% in 2010, such an outcome would mean that euro-zone debt would have spent two full decades above the 60% threshold mandated by the European Union's Maastricht Treaty.”

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	85.76	LONG USD	STRONG	10 /17/12	78.71	8.22%
GBP/USD	1.6194	LONG GBP	STRONG	11/26/12	1.6022	1.07%
EURO/USD	1.3262	LONG EURO	STRONG	11/26/12	1.2970	2.25%
EURO/JPY	113.76	LONG EURO	STRONG	11 /21/12	105.38	7.95%
EURO/GBP	0.8188	LONG EURO	STRONG	11/26/12	0.8095	1.15%
GBP/JPY	138.82	LONG GBP	STRONG	11/21/12	131.02	5.95%
USD/CHF	0.9109	SHORT USD	STRONG	11/26/12	0.9284	1.92%
USD/CAD	0.9915	SHORT USD	WEAK	11/26/12	0.9932	0.17%
AUD/USD	1.0383	SHORT AUD	WEAK	12/27/12	1.0383	0.00%
AUD/JPY	89.02	LONG AUD	STRONG	10/17/12	81.19	9.64%
USD/MXN	12.9671	SHORT USD	STRONG	11/26/12	12.9780	0.08%