FX: Consequences of Infighting in US and Europe

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With no major U.S. economic reports scheduled for release this morning, the U.S. dollar and other major currencies will most likely take their cue from equities. The increase in the NFIB small business confidence index was small and the IBD/TIPP Economic Optimism index at 10am ET is not expected to have much impact on the greenback. Stock futures are pointing to another lower open for U.S. equities and as a result, the dollar is trading higher against most major currencies. Federal Reserve Vice Chairman Janet Yellen will be speaking this afternoon on Federal Reserve communications. She is a traditionally more dovish than her peers and therefore her comments could on weigh on the dollar.

Congress is also back in session this morning and they have 4 days to work on a deal to avoid the Fiscal Cliff before taking another 1.5 weeks off for Thanksgiving. Breaking the gridlock between Democrats and Republicans won’t be easy and with only a few more weeks to go before the automatic tax cuts and spending programs expire, we are hopeful but not optimistic. For more on the How the Fiscal Cliff could Impact Currencies, read our Special Report on the Fiscal Cliff. In the U.S., the battle between Republicans and Democrats has put the U.S. economy in it’s a current position which is at risk for a recession.

Infighting between the Eurogroup and the IMF is also one of the main reasons why there has been no progress on Greece. The IMF wants an official write down of Greek debt and European officials oppose this vehemently. They also want to link debt sustainability with disbursement while the Europeans want to decouple these 2 issues. Early gains in the euro are beginning to fade after the German Finance Ministry denied a rumor created from an article in a German newspaper that claims Germany wants to bundle all 3 aid payments to Greece into one big payment of EUR 44 billion. As expected, euro area finance ministers failed to reach a deal this week and remove the risk of a Grexit. They agreed to give Greece 2 more years to meet their fiscal adjustment programs and postpone the primary decision on aid disbursement to November 20th. Between the market’s ongoing concerns about Greece, a weaker ZEW survey and higher Spanish 10 year bond yields, the euro has fallen to a fresh 2 month low against the U.S. dollar. The 100-day SMA and second standard deviation Bollinger Band at 1.2640 provides near term support.

Kathy Lien
Managing Director

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