Article / 16 November 2012 at 14:51 GMT

USD mood looks nervously at fiscal cliff negotiations.

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank

White House makes noises on a deal to delay decision on the “sequester” portion of the fiscal cliff, but market shrugs that off ahead of Thanksgiving week holiday week next week. Key data for Japan next week.

Trading was generally listless today, as JPY crosses consolidated a bit, but not severely, and as the sterling took back a bit of territory versus the single currency, as did the EURUSD, which tested the important 1.2800/25 support zone yesterday.

It appears the White House may be ready to delay decision on parts of the threatened fiscal cliff. But those noise from the Obama team aren’t all out bullish for risk because they only address the “sequester” portion of the fiscal cliff– the automatic spending cuts – rather than the equally, if not more contentious issue of tax cuts, so market relevance here in the near term on this may be somewhat limited.

In fact, what may be happening here is that the Obama team is cleverly “picking its battles” by setting up the Tax Cut debate as a marquis effort to differentiate itself from the Republican opposition and get tough on this portion of the cliff. All politicians hate to cut Pork (spending) because it hits all constituents, red or blue, while Democrats can fight to “soak the rich” with zero impact because they won’t lose votes by doing so and have a wedge issue at mid-term election if budget picture looks even worse. Another thing to consider here is timing: next week is Thanksgiving week in the USA, which is all about family harmony, and nothing spoils a family get-together in America like politics, so don’t look for any rhetorical escalation at all on the cliff in the near term. The fireworks may not begin to go off for this issue until the week after next.

The JPY move proved a bit too much, a bit too fast, as USDJPY consolidated modestly, though we still look to the weekly close to see whether the 81.00 level is taken out on the weekly (the actual Ichimoku cloud level is more like 80.80, so it will take a bit of selling to keep this break from materializing today. As well, the Chikou line crossed above the price on the weekly, another bullish development for fans of Ichimoku tech analysis. Next week’s cloud support dips to 80.63, so keep an eye on that level as we look to the reaction to Japan’s trade data next Wednesday.

Chart: USDJPY weekly


Looking ahead
(By the way, note the very weak US Industrial Production data for October – some will be tempted to “blame it on the ‘cane”, but the previous month was also revised down and the storm could only have affected the last couple of days of the month, while the negative trend has been developing for months now.)

Next week features a Bank of Japan meeting, with outcome on Tuesday, if any, and we’re likely to see a quiet BoJ after the previous month’s move. The big BoJ question comes after the coming election and the degree of independence that the bank maintains in the event of an LDP/Abe led government.

Also on Tuesday, we have European Finance Ministers meeting to discuss Greece.

Bernanke will speak at the Economic Club of New York on Tuesday. We have Japan’s key October Trade Balance data on Wednesday as well as the latest BoE MPC minutes. The US is quiet for most of the week with Thanksgiving holiday affecting volume all week, with half days on Wednesday and Friday and a close of all business on Thursday.

On Thursday, we have the China HSBC flash Manufacturing PMI for November and the flash PMI’s for Germany and the Euro Zone that day as well. The German IFO survey is up on Friday.

Economic Data Highlights

  • Euro Zone Sep. Trade Balance out at +11.3B vs. +9.5B expected and vs. +5.2B in Aug.
  • Canada Sep. International Securities Transactions out at +13.9B vs. +7.56B in Aug.
  • US Sep. Total Net TIC Flows out at +$4.7B vs. +$50B expected and +$63.5B in Aug.
  • US Oct. Industrial Production out at -0.4% MoM vs. +0.2% expected
  • US Oct. Capacity Utilization out at 77.8% vs. 78.3% expected and 78.2% in Sep.

Upcoming Economic Calendar Highlights (all times GMT)

  • US Fed’s Lockhart to speak (2045)
  • China Oct. Property Prices (Sun 0130)
  • New Zealand Oct. Performance of Services Index (Sun 2130)
  • New Zealand Q3 Producer Prices (Sun 2145)
  • UK Nov. Rightmove House Prices (Mon 0001)



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