Concerns Over 'Fiscal Cliff' Dissipates

Concerns Over 'Fiscal Cliff' Dissipates


FX risk appetite firmed overnight as news of a potential deal to avoid the 'Fiscal Cliff' kept investors optimistic. Asia's regional equity indices on the majority higher as the Nikkei rose 0.96%, Shanghai rose a negligible 0.10% but Hang Seng fell -0.23%. In a very quiet trading session EURUSD edged up to 1.3190 but failed to penetrate the 1.3200 psychological barrier. USDJPY continued to retrace climbing to 84.08 as the absence of major flows or news kept traders sidelined.

According to Reuters, next week the BoJ is expected to ease monetary policy and might adapt a 2% inflation target as the election of Prime Minister Shinzo Abe will clearly increase pressure to enact deflation beating policy. The speculation of a more aggressive BoJ was supported by news that BoJ Governor Shirakawa met Japan's Prime Minister-elect Abe for a meeting. Although no details of the meeting were released. AUDUSD had a see-saw session as the RBA minutes failed to signal any change in monetary policy, giving the pair room to rise to 1.0558. However, for the remaining part of the session the pair shifted into consolidation mode and slide back down to 1.0530. That said heading into the New Year we are bullish on the AUD. Risky assets continued to gain on the general improvement of global demand and sign of progress in U.S budget talks. Brent crude further consolidated its position above the $108 handle while Iron ore has gone ballistic.

Overnight the RBA minutes indicated a more balanced tone but added little new information. The RBA members had discussed 'further easing may be appropriate in the period ahead' however, held pat 'for the time being' as inflation has started to tick up and the outlook for the global economy appears a bit brighter. Finally, the latest round of news flow indicate that US policy makers are closer to a compromise that would avoid looming spending cuts and tax rises that could send the US backing into recession.