Post-Fed Optimism Trumped By Fiscal Fear

The post-Fed optimism seen Wednesday all but faded overnight with markets refocusing their gaze on the impending fiscal cliff. Currencies, in part, reflected a mild risk-off demeanor, with the greenback edging slightly higher following Wednesday’s Fed-induced slump. The Fed announced a further $45 billion in asset purchases per month to replace the soon-to-expire ‘operation twist,’ in addition to the existing quantitative easing program (QE3), which buys $40 billion in asset purchases per month. In a landmark decision, the Fed have also adopted explicit guidelines for when the withdrawal of stimulatory policy is warranted, with monetary policy set to remain accommodative until the unemployment rate is below 6.5% and/or inflation is above 2.5%. The greenback also extended gains against the Japanese yen, with the pair forging highs of Y83.68, last seen in March this year.

Meanwhile the ‘cliff clock’ is counting down, and a lack of perceived progress in negotiations appears to be negating what might have been a sustained rally. While the Fed decision to ease and provide markets with greater transparency should be a short-term win for markets, the Fed’s efforts by no means counter the potentially damaging effects of the fiscal cliff scenario, which in turn limits potential upside.

The latest feedback from House of Representatives speaker John Boehner suggests the impasse between Obama’s Democrats and Republicans remains wide, noting Obama’s was “unserious” about building a consensus with the opposition, adding If the president will step up and show us he’s willing to make the spending cuts that are needed, I think we can do some real good in the days ahead.

Encouraging employment data also failed to inspire upside, with the number of jobless claims falling to a nine-week low of 343,000 for the week ending December 8. Retail activity however failed to meet estimates with sales rising 0.3% in November from a fall of 0.3% in October. Economist’s estimates showed slightly higher growth of 0.5% was expected.

Euro Stable As Greece Gets The Nod On Bailout
Across the Atlantic, the euro remained stable against the greenback with investors eyeing progress on the Greece front. After months of delays, European finances ministers have agreed to release Greece’s next tranche of bailout funds with Euro-group Chief Jean-Claude Junker confirming the funds will be flowing to Greece as early as next week. Although Greece’s fiscal woes are far from over, the news provides a sense of closure for markets, at the very least takes the ‘grexit’ scenario off the table for now.

In other Euro region news, the European Union have agreed to give the European Central Bank the power to police euro-regions banks, in an effort to stabilise the regions banking system and intervene at the first sign of trouble. The new oversight powers will begin from 2014.

The euro’s recorded respectable gains over the week, up just over 1% against the greenback while taking a near 2.5% leap against the besieged Yen. Still it’s apparent the Euro has built in a significant amount of ‘good news’ in recent weeks, suggesting a period of consolidation may be in order. At the time of writing the Euro is buying $1.3072 and ¥109.25.

NZD: The Commodity Currency Of Least Resistance
In keeping with the recent theme of out-performance, the kiwi remain the commodity currency of least resistance, giving up only moderate ground against the greenback after forging fresh eight-and-a-half-month highs of 84.62 cents. We anticipate resistance at 84.6/7 levels to act as a barrier in the near term as price action consolidates after this week’s solid gains. The kiwi’s performance against the Yen, however, remains solid with price action now forging fresh four-year highs above the ¥70 region. The NZDJPY pair has risen near 3% this week alone.

AUD Eyes China PMI; U.S. CPI To Define The Trend
Across the Tasman, the Australian dollar consolidated its post-fed highs, easing deeper into the 105 handle after posting a fresh three-month high of 105.87 yesterday. The local unit is currently buying 105.16 cents, with the next test for short-term demand being today’s HSBC’s China flash manufacturing PMI. The index is expect to remain in expansion territory with a reading of 50.8 in December, only slightly higher than 50.3 in October. While a stronger-than-expected print will encourage further upside, we consider gains limited below 106 cents, with yesterday’s highs of 105.87 likely to contain a move higher. Likewise, a move below physiological support at 105 cents should be countered by previous supportive behavior noted around the 104.6 region.

This evening, the local unit’s fortunes will be contingent on U.S. dollar demand surrounding the release of November CPI data, with slower than expected consumer price growth likely to weigh on the greenback in light of the Fed’s new inflation guidelines. Headline inflation is expected to fall 0.2 on month, or growth of 1.9% in annual terms. The Fed has pledged its policy will remain accommodative until the unemployment rate is below 6.5% and/or inflation is above 2.5%.