FX: Behind the Post Christmas Day Risk Rally

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2012 hasn’t officially come to an end but with Christmas now behind us, it is quickly drawing to a close. For Congress this means that the pressure to come up with a Fiscal Cliff deal is heating up and President Obama has already returned to Washington to get the ball rolling. Based on the price action in the forex market this morning, it appears that investors remain optimistic but a large degree of their optimism is tied to the prospect of more stimulus from the Bank of Japan. USD/JPY rose to a fresh 20 month high and the gains have driven all other Yen crosses higher. This means that demand for EUR/JPY, which rose to its highest level since August 2011 is pushing the EUR/USD higher. Without the rally in USD/JPY, most of the major currencies would probably be unchanged or trading lower so Yen weakness is behind the post Christmas Day risk rally in currencies.

However not all pairs participated in the post Christmas day rally – the New Zealand dollar continues to be hit hard by position adjustments. While many economists attributed the NZD/USD sell-off to U.S. Fiscal Cliff concerns and to some degree this may be true, we believe that recent data disappointments has led many traders to unwind their NZD/USD long positions. Gravity has taken hold as what has risen the fastest is now falling the hardest.

As reported by our colleague Boris Schlossberg, USD/JPY is on a tear this morning after Shinzo Abe was officially elected Prime Minister of Japan, making him both the first and seventh Prime Minister in the last 6 years. Right out of the gate, he made it clear that fighting deflation is their number 1 priority. Over the weekend, Abe reaffirmed his commitment to forcing the Bank of Japan to adopt a higher inflation target. On December 23rd, he said in a TV interview that if the BoJ does not accept a 2% inflation target in January, BoJ law would be changed. Previously some economists and investors expected Abe to back off the BoJ after he became Prime Minister but this renewed commitment drove the Yen sharply lower as everyone now expects the BoJ to acquiesce, making a 2% inflation target in January a done deal. According to the BoJ minutes from the November monetary policy meeting, some members of the central bank felt the “need to take decisive action without ruling out any options if necessary.” While the BoJ did not ease that month and increased asset purchases the following month “any options” could be interpreted to include a higher inflation target.

This morning’s U.S. economic reports were mixed. According to S&P Case Shiller, house prices rose 0.66% in the month of October. The Richmond Fed index dropped to 5 from 9 for the month of December. Although U.S. markets are open for trading today, the lack of participation should make for a relatively quiet North American session unless there are fresh Fiscal Cliff headlines.

Kathy Lien
Managing Director

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