Risk bonanza after Friday’s bounce continues

The FX risk-o-meter shows traders on cloud nine ahead of the US equity market open as market hopes surrounding fiscal cliff deal have market bears on the ropes and the USD back to the weakside. BoJ up tonight.

The only theme going at the moment was the big, high momentum reversal off of the lows on Friday as the US political hints that a deal may be in the pipeline has the market dizzy with anticipation and bears on the ropes again. There may be little further noise during this holiday week in the US, which could mean that we float relatively high in risk appetite terms before a ceiling is found and a range is established – hard to tell when it’s a game of sentiment only at the moment.

Looking ahead
In the pipeline, we look ahead to the Bank of Japan meeting tonight – actually suspecting the BoJ keeps a bit quiet ahead of the election next month and after its recent new easing expansions. Could this mean a bit of consolidation in the JPY weakening? Beyond that, the big focus for the JPY is the Wednesday trade data as we size up the damage to Japanese terms of trade from the popular Chinese boycott of Japanese goods.

In Europe, the focus will be on tomorrow’s EcoFin meeting and whether Greece gets its next aid payment as we have an EcoFin meeting tomorrow. And what strings are attached, etc? Please also read great Evans-Pritchard piece over at the Telegraph on the transition toward Germany now finally actually having to pay for something if the next round of Greek aid goes through. In EURUSD, the 1.2800/25 zone is the key zone of resistance now that bars the way back into the old range, while the limbo to the downside stretches all the way to the 1.2500 area.

In the US, any downside data this month will all be written off as “hurricane disruptions”, so markets are likely to remain a confidence game about where the fiscal cliff negotiations will take us for the next couple of weeks at least, and we may get little on that front until next week.