Market Drivers for Dec. 12, 2012
Risk on continues as EU work on banking union, USDJPY ignores FOMC rallies to new highs
UK labor data beats
Nikkei up 0.59% Europe up 0.11%
Oil $86.50/bbl
Gold $1720/oz.

Europe and Asia:
AUD Westpac Consumer Confidence -4.1% vs. 5.2%
JPY Machine Orders 2.6% vs. 3.1%
JPY Tertiary Industry Index -0.1% vs. -0.3%
CHF ZEW Survey 15.5 vs. -27.9
EUR German CPI -0.1% vs. -0.1%
EUR Euro-zone Industrial Production -1.4% vs. 0.3%
GBP Jobless Claims Change -3K vs. 5.9K
GBP Average Weekly Earnings 1.8% vs. 1.9%
GBP Claimant Count Rate 4.8% vs. 4.8%
GBP ILO Unemployment Rate 7.8%

North America:
USD FOMC Rate Decision 12:30
USD Monthly Budget Statement 14:00

Risk FX remained well supported in morning European trade today as news of progress on EU banking union and better than expected UK labor data kept high beta currencies well bid ahead of the FOMC meeting later in the day. EU finance ministers are expected to take up the issue of the banking union at their meeting today. France and Germany have been at loggerheads over the plan to allow ECB more supervisory control over EU banks, but the latest newsflow suggests that officials are now optimistic about resolving their differences with German policymakers stating that they expect progress to be made today.

An EU banking union is viewed by the market as one of the cornerstones of European integration that would lead to more uniform risk standards across the union and serve to further support the euro. That’s why EURUSD ignored the very weak economic data (with IP shrinking by -1.4% in October) and remained well bid trading near session highs at 1.3020 in mid morning Frankfurt dealing.

Elsewhere UK labor data beat estimates handily sending cable to session highs as employment situation appears to improving raising hopes amongst investors of better growth in 2013. UK claimant count printed at -3K versus estimates of 7K while the claimant count rate remained at 4.8% as expected. The unemployment rate also remained the same at 7.8% but the ILO jobless numbers fell by 82K for the three months through October. The one sour note in the report was that average earnings rose only 1.8% versus 1.9% forecast as wage pressures continue to weigh on UK workers.

Still, the overall labor report was certainly an upside surprise given the lackluster rate of recent economic data that suggested UK may dip into a triple dip recession in Q4 of this year. Private sector employment has now reached its highest levels since 1999. The labor data suggest that aggregate demand in UK may be better than the market consensus as the anticipated post-Olympics layoffs have not materialized. If labor data numbers continue to improve for the next several months, economic activity is sure to follow and the prospect of yet another contraction will be greatly diminished.

Cable responded well to the news rising to session highs of 1.6130, but the pair is likely to stall at these levels ahead of major triple top resistance at 1.6150. With focus turning to the FOMC meeting later today, currency markets are likely to tread water until traders get more clarity from Dr. Bernanke and Co. but if the Fed maintains a dovish bias the 1.6150 level will likely be broken as the day proceeds.

The FOMC meeting is certain to be the key event risk of the day with markets expecting some sort of a QE4 announcement especially in light of the fact that Fiscal Cliff talk appear to be going nowhere. The Fed is therefore very likely to remain highly accommodative to offset any austerity risk posed by the expiration of tax cuts and mandatory spending cuts that could go into effect at the start of the year if a deal is not done. That’s why it is particularly surprising that USDJPY is acting so well today given the prospect of further Fed QE. The pair broke through the recent high of 82.70 ostensibly on the news of North Korea rocket launch, but the geo-political threat in the region appears to be minor, yet USDJPY has remained well bid. For now the pair is capped at 83.00 by reported 2B worth of exporter sell orders at that level, but could challenge the barrier as the day progresses unless the Fed surprises the market with some unexpected new policy of accomodation.

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