Fiscal Cliff Talks Dominate Market, Dollar Firm On Risk Aversion

Risk aversion dominated markets since Obama's re-election as US president as the Dow suffered the biggest decline in a year and dropped -312.95 points overnight to close below 13000 psychological level at 12932.73. Asian stocks follow with Nikkei down nearly 150 pts and HK HSI down over -300 pts at the time of writing. Crude oil is back pressing 85 level after jumping to above 89 earlier this week. Though, gold is supported by the expectation of continuation of Fed's QE program and stays firm above 1700 so far.

The dollar and yen maintains a firm tone against other major currencies but the strength in both currencies is far from being overwhelming. Euro stays weak even though Greek parliament approved the austerity measures that's crucial to unlock the next tranche of bailout fund. New Zealand dollar is the biggest mover in the past few hours after poor employment data. Focus will turn to BoE and ECB announcement later in the day.

The so-called fiscal cliff is being mostly cited as the reason in driving the markets down. After Obama's win in the presidential election, market focus quickly turned to fiscal cliff and the lingering political gridlock with lower house being controlled by Republicans and senate by Democrats. In order to deal with fiscal issues, President Obama would probably announce his intention to bring back the Simpson-Bowles proposal which includes annual discretionary spending cuts of $200b, increase in tax revenues $100b, a reduction in entitlements and some changes to social security.

In December 2010, the proposal was stalled as it failed a vote with 11 of 18 votes in favor, with a supermajority of 14 votes needed. Former vice Presidential candidate Paul Ryan voted against Simpson-Bowles at that time and he will continue to chair the House Budget Committee. Therefore, his comments regarding the issue in coming days might give some hints on his preference. If the proposal could be adopted, the Congress would probably delay the fiscal cliff and avoid letting the economy to fall to recession.

In Greece, the parliament approved the new austerity program with 153 votes in favor over total 300 seats. Prime minister Samaras said in a statement that "Greece today took a great, decisive and positive step". He emphasized that the vote was a "this vote was a condition that will create jobs for our children, for all of Greece to see better days."

The bill approved include raising retirement age fro 65 to 67 as well as cutting wages and pensions for the second time this year. The approve is an important step to secure the EUR 31 tranche of bailout fund from EU/ECB/IMF. And the focus will then turn to vote on 2013 budget on Sunday, which is another step to get approvals for the bailout fund from EU finance ministers as they meet next week.

Talking about ECB, We expect the ECB to leave the main refinancing rate unchanged today. It would also likely to keep the non-standard measures unaltered. While the economic outlook remained uncertain with risks skewing to the downside, the central bank would likely stand on the sideline this time as deflationary risks appeared contained, giving policymakers some relief.

The BOE will also likely make no change in its monetary policy at today's meeting as the latest GDP report showed some green shoot. Yet, Governor Mervyn King stated last month that 'should those [more positive] signs fade the MPC does stand ready to inject more money', suggesting the decision would not be unanimous.

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%. 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%, comparing to 12% yesterday. 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.

Technical development in NZD/USD argues that the rebound from 0.7457 is possibly finished at 0.8356 already. The pair has been bounded in consolidation pattern since 2011. A break of 0.8101 near-term support will likely trigger the start of another leg inside the pattern and target 0.7457 support level.

Elsewhere, Australian employment rose 10.7k in October, much better than expectation of 0.5k while unemployment rate was unchanged at 5.4%. Japan machine orders dropped -4.3% mom in September and Eco watcher current sentiment dropped to 39 in October. Swiss unemployment rate and Germany trade balance will be released in European session but main focus is ECB and BoE rate decision. Canadian trade balance, new housing price in index, and US trade balance and jobless claims will be featured later in the day.