GO Markets FX Analysis | Risk currencies strike positive tone on fiscal cliff progress

Risk currencies strike positive tone on fiscal cliff progress

US equities extended Friday’s gains overnight with market participants remaining encouraged by signs of progress on the fiscal cliff front. Better than expected housing data also kept markets looking to the bright-side. Existing home sales rose 2.1 percent in October to represent annual sales of 4.79 million. Economists had expected annual sales of 470 million. Across the Atlantic, markets rallied ahead of Tuesday’s Euro-group meeting with Greece expected to get the nod of approval on the long awaited bailout installment of 31.5 billion euro’s. Still, it’s the prospect of the disbursement of additional funds that put the Euro on a winning trajectory, with reports suggesting over 43 billion euro’s could be forthcoming, made up of 31.5 billion euro’s due for the second quarter, 5 billion for September and 7.2 billion due at the end of December.  Although this has not been confirmed, the reports are considered to have substance.

Meanwhile, markets kept an eye on escalating tensions in the Middle East, with Israel launching an offensive against the Hamas-led Gaza last week. Fighting in the region has prompted fears of disruption to oil supplies, with the region accounting for around 20 percent of the world’s crude oil. Also adding to upside pressure for crude prices is the ‘good news’ factor in the U.S, with progress on the ‘fiscal cliff’ front easing some of the perceived recession risk.

Currency activity reflected a risk-on aptitude with the Kiwi leading the commodity bloc currencies higher, while the Euro managed to regain form to break the upside of $US1.28. The Yen remained out of favor against major counterparts falling to fresh 7-month lows against the Aussie dollar, but began to consolidate gains against the greenback, retreating back towards Y81-figure.

AUD looks to RBA to define the trend

The next key domestic directive will be the release of the RBA minutes at 11.30 AEDT. Interbank cash rate futures currently imply a 60 percent chance Stevens and Co will slice 25 bps off the official cash rate in December, although we believe the exchange rate is pricing in a roughly ‘even odds’ chance of a rate cut. A dovish interpretation of today’s minutes will see the Aussie come under renewed pressure, however if we look back to ensuing statement in the November meeting, it would suggest the board are a little less relaxed on inflation front than displayed in previous correspondence. While there appears to be no inflation alarm bells sounding, the statement justifies the decision citing more positive global conditions and slightly higher than expected inflation data. The use of the language rates are appropriate “for the time being,” is perhaps another way of saying ‘we’re ready to cut rates, but we’ll see how things pan out of the next month’. A quick scan of closely watched domestic barometers would suggest the chance of a rate cut is slightly less than after the November meeting. China continues to show tentative signs of stabilising, and local jobs data well and truly outpaced expectations. Strength in home loan activity is also considered a barometer of consumer confidence and positive pre-cursor for consumption, suggesting the impact of the RBA’s recent interest rate cuts may be beginning to infiltrate the economy. Still, there’s a valid case to be made for a December rate cut and speculative activity between now and December 4 will intermittently govern the Aussie’s appeal.  It is however clear, the Aussie’s risk credentials will remain in-tact, suggesting that while domestic factors could have a dampening effect, global markets will remain a key determinant of the Australian dollar’s overall appeal. At the time of writing the Australian dollar is buying 104.1 US cents.

Bank of Japan to hold fire on stimulus

Also in the frame today is the Bank of Japan policy decision, which is expected to see official rates on hold and no further monetary easing. The focus for Yen pundits from here will be on the December 16 election, which is expected to see pro-stimulus leader of the Liberal Democratic Party, Shenzo Abe take the reins. Abe has made clear his intentions to counter Japan’s deflationary spiral by unleashing “unlimited” quantitative easing measures, à la, the US Federal Reserve. This of course calls to question the autonomy of the Bank of Japan, with governing members expected to be replaced by Abe’s ‘pro-stimulus’ allies.


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