Despite Friday’s FC Failure FX Remains Upbeat on a Deal

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Market Drivers December 24, 2012
Markets very quiet on Christmas Eve
Abe puts further pressure on BOJ
Nikkei -0.99% Eorostoxx -0.2%
Oil $88.56/bbl
Gold $1664/oz.

Europe and Asia:
GBP Hometrack Housing -0.1% vs. -0.1%

North America:
no events

As expected its been a an exceedingly quiet night of trade as a number of markets in both Asia and Europe are closed for Christmas Eve, but while equities drifted lower high beta FX was surprisingly resilient with both EUR/USD and GBP/USD trading above the Friday close at 1.3200 and 1.6200 respectively. USD/JPY was also higher as the pair gaped slightly on the open and traded to 84.50 following yet more comments from Prime Minister Abe.

Over the weekend Mr. Abe stated that if the BOJ does not adopt a 2% inflation target he would push for a revision of the BOJ Act, forcing the central bank to me more accommodative. More specifically Mr. Abe wants the BOJ to become as aggressive in its approach to monetary easing as both the Fed and the ECB in order to counterbalance the effects of QE and LTRO on the yen.

Mr. Abe went so far as to state an exchange level for the yen noting that at 90 USD/JPY exchange rate would be beneficial to the Japanese exporters. Mr. Abe’s jawboning is clearly having an impact as he has almost single handedly moved the pair higher by 5 big figures over the past several weeks. USD/JPY now faces a key test at the psychologically important 85.00 level and may make a run for it before the end of the year, if US policymakers make any progress on Fiscal Cliff negotiations.

The resolution of the Fiscal Cliff issue remains the single biggest driver of trade in the currency markets, but despite the fact that negotiations essentially failed on Friday, the currency markets remain remarkably sanguine about the outcome. The conventional wisdom is that the Senate will produce a some sort of a compromise stop-gap measure that will not be filibustered by the GOP and will then move on to passage in the House with the help of Democrats and moderate Republicans.

The end of the week therefore sets up as possible volatility event for the market with some analysts expecting a 1% rally for risk FX if a deal looks to be done, but a possible severe selloff of 2% or more if it fails to materialize. The risks are skewed to the downside as market remains complacent about a compromise, but for now traders are betting that a deal gets done.

Boris Schlossberg
Managing Director

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