It has been quiet morning in the foreign exchange market with European currencies trading slightly higher against the U.S. dollar and commodity currencies slightly lower. While the price action in the FX market may be conflicting the decline in U.S. bond prices and rise in equities suggests there’s a general sense of optimism in the financial markets.
With President Obama putting a new deal on the table that would keep Bush era tax cuts in place for households earning less than $400,000, progress is being made on Fiscal Cliff talks. This offer instilled confidence in the market because it is closer to the deal proposed by House Speaker Boehner and shows that Obama is finally willing to consider a higher threshold. Hopefully even more progress will be made over the next few days but whether a deal will be announced by the end of the year is still an open question. Senator Bob Corker from Tennessee said on CNBC this morning that they are “not close to a deal” which may be true considering that Boehner is still considering a plan for tax cut extensions for households earning less than $1,000,000. Unfortunately the back and forth on the Fiscal Cliff will continue to determine how currencies to trade over the week and whether risk appetite can be sustained. For the time being, it appears that investors aren’t worried about falling off the cliff – probably because they don’t think that U.S. politicians are on a suicide mission.
Meanwhile the current account balance was the only piece of U.S. data released this morning and the report showed the deficit shrinking to -$107.5B from -$118.1B in the third quarter thanks to improvements in trade activity and increase in foreign investments.