Dollar And Yen Jumped On Risk Aversion

We were correct in anticipating deeper fall in global stock markets last week. Obama's win in the US presidential election kicked start a round of steep sell-off in equities markets as focus has now turned to the so-called fiscal cliff. The dollar and, to a larger extent, yen benefited from risk aversion and jumped across the board. Most major currencies were lower, including the euro, which was weighted down by uncertainties regarding the situation in Greece and outlook of the eurozone economy.

The kiwi was the weakest one on poor job data, though, followed closely by Canadian dollar. However, we were wrong in predicting weakness in Aussie, as it was in turned supported by RBA's decision to keep rates unchanged, and then an impressively strong employment report.

Technically, we'd like to point out that Dow is pressing a trend line support as well as the 55 weeks EMA. That is, we could at least see a rebound in the near-term and that could limit the strength of dollar and yen, or even triggered a notable pull back. Meanwhile, in the currency markets, price actions in European majors since October are viewed as corrective. The corrections in EUR/USD, GBP/USD and USD/CHF look a bit stretched and thus, we'd tend not to chase and the current move. Instead, we'll start to focus on reversal signal, patiently. Similar picture is seen in yen crosses as we'd prefer to see decisive break of 100.14 in EUR/JPY and 124.72 in GBP/JPY before abandoning our bullish view.

Quickly after being re-elected as US president, Obama has started public negotiation with House Speaker Boehner on the issue of fiscal cliff. Obama emphasized that the election results showed that the majority of Americans agreed with his "balanced" approach. That include pushing top tax rate up from 35% to 39.5% and tax-cut extension for people earning less than $250k. Meanwhile, Boehner's Republicans advocate an approach which avoid tax hike and spending cuts by overall entitlement spending and tax code.

Obama is set to meet with House Democratic Leader Pelosi, Senate Majority Leader Reid and Senate Minority Leader McConnell on November 16. And it should be noted that should there be no agreements made before the end of the year, there would be a $607b in automatic spending cuts and tax hikes to take effect in January.

In Europe, ECB left the main refinancing rate unchanged at the November meeting. President Draghi signaled that the 17-nation bloc's economic outlook has weakened. Yet, policymakers appeared to have no intention to add further easing measures to contain the deterioration.
One reason we believe is the unchanged inflation outlook. Meanwhile, the central bank viewed current interest rates as appropriate and "accommodative" enough for the current situation, citing negative real rates as an evidence of this very easy stance.

In European Commission's autumn forecast, it said that recession in the 27-states EU and 17-states Eurozone would be deeper than originally expected. EU economy is expected to contract by -0.25% this year and grow 0.5% in 2013, downwardly revised from prior projection of 0% growth in 2012 and 1.3% growth in 2013. The eurozone economy is expected to contract by -0.4% in 2012 and grow a mere 0.1% in 2013, downwardly revised from prior projection of 1% growth in 2013.

Meanwhile, eleven eurozone states are expected to miss their deficits targets for 2013, including Spain, France and Italy. Overall, EC also warned that Europe's "economy continues to deal with a difficult post- financial crisis correction," and "the distress in more vulnerable member states has progressively started to affect the remainder of the union." Meanwhile, "the experience of the past two years shows that reversals of sentiment can happen very rapidly if the implementation of measures falters."

Also, a few points to note from the report is that Spain's economy is expected to contact by -1.4% this year and next. That's much worse than Spanish government's projection of -0.5% in 2013. French economy is expected to growth 0.4% in 2013, just half of government's projection of 0.8%. Germany's growth forecast in 2013 was also lowered sharply to 0.8%, down from prior projection of 1.7%.

Separately, ECB President Draghi warned the debt crisis is beginning to impact the region's largest economy. He noted that "Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area. But the latest data suggest that these developments are now starting to affect the German economy."

In Greece, the parliament approved the new austerity program with 153 votes in favor over total 300 seats, which was a positive news. But also, it's reported that eurozone finance ministers would not make a decision on releasing Greece's bailout fund this week. Instead, they'd wait for a final report from troika instead. A draft version of report would be available for Monday's EcoFin meeting, but that's believed to be insufficient for making the decisions. And, it's believed that November 26 would be the possible date to finally sign off the release of the EUR 31.5b tranche of bailout fund to Greece.

Spain finished 2012 financing by selling EUR 4.8b in bonds. That included sale of EUR 0.731b in 20 years bonds, the first longer term issue in 18 months. The auctions were considered smooth and successful and beat the Treasury's target of EUR 3.5-4.5b. Overall, the results also argue that there is no immediate need to seek a sovereign bailout and activate ECB's OMT at this moment.

BoE kept rates unchanged at 0.50% and maintained the size of the asset purchase program at GBP 375b. No detail was released and focus will turn to the inflation report to be released on November 14, and minutes to be published on November 21.

RBA left the cash rate unchanged at 3.25% in November as the upside surprise on inflation has led to the pause. The central bank also delivered a more optimistic tone in the statement regarding Australia's economic outlook. While policymakers continued to view that the mining boon would peak next year, they would now likely adopt a more a reactive approach than a proactive one. We retain our view that the RBA would cut interest rates again in December.

New Zealand employment unexpectedly dropped -0.4% qoq in Q3, drop for the second straight quarter, and pushed unemployment rate to 13 year high of 7.3%. The kiwi tumbled as markets are raising the bets of rate cuts by RBNZ. Chance of a 25bps cut in December as implied by interest-rate swaps rose to above 20%. Though, it's noted by some economists that there should be enough evidence for RNBZ to cut by the end of the year yet and the central could possibly wait for another quarter of weak data before acting.