Risk FX Looks To Washington DC For Direction

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Market Drivers Nov. 28 2012
Very quiet listless night of trade
German CPI in line with expectations
Nikkei -1.22% Europe -0.57%
Oil $86.90/bbl
Gold $1743/oz.

Europe and Asia:
EUR German CPI

North America:
USD New Home Sales 10:00
USD Beige Book 14:00

It’s been an extremely slow night of trade in the currency market, marked by absence of any meaningful economic data or fresh geopolitical news as risk currencies consolidated in very tight ranges through most of Asian and European morning trade. Yen crosses were the only major market movers as USD/JPY continued to correct its recent rally dropping from 82.20 to 81.70 in morning European dealing.

Japanese press reported that the government may announce another stimulus package of approximately 880B yen as soon as this Friday, but the news was roundly ignored as profit taking continued in USD/JPY. One possible reason for the renewed dollar weakness is the growing sense of concern in the market that US lawmakers will not be able to come to workable compromise before the Fiscal Cliff provisions of the budget start to kick in, precipitating a round of tax increases and spending cuts that could quickly snuff out the nascent US economic recovery.

Yesterday’s somber comments by Senate Majority Leader Harry Reid had an instantaneously negative impact on risk assets and investor sentiment has remained cautious ever since with Asian and European bourses lower as market participants keep a wary eye on Washington DC.

Meanwhile despite the guarded atmosphere the the Aussie has remained remarkably resilient holding ground while both euro and sterling slip lower. The unit appears to be receiving the benefit of safe haven flows as the political situation on both sides of the Atlantic remains murky.

In economic news Australian construction data for Q3 showed an improvement in activity rising by 1.7% but was lower than the forecast expectations of 2.4% Still this was a marked jump from quarter prior when construction expanded only at 0.9% rate and shows that the sector remains relatively healthy which may prompt the RBA to hold rates steady at its next meeting on December 3rd. Markets are divided about chances of another rate cut and if the RBA remains steady, the Aussie will likely continue to outperform as investors chase yield in a near zero interest rate G-20 world.

For the time being the Aussie remains an oasis of calm amidst political turbulence in Europe and US as policy makers in both places attempt to deal with intractable budget policy issues. In North America the calendar carries New Home Sales and the Beige book reports, which may provide some lift to risk in morning US trade.However, if US lawmakers continue to remain at a stalemate the risk aversion flows will likely accelerate as the day proceeds and even Aussie will not be able to hold its bid for much longer.

Boris Schlossberg
Managing Director

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