Risk Currencies Favoured But Caution Persists

Despite buoyancy across the risk spectrum, caution reigned supreme overnight with little in the way of conviction to carry markets significantly higher. True to form, Greece and the US fiscal cliff stole the limelight as investors responded to the usual conjecture and innuendo surrounding Greece’s ability to secure a much needed top up of bailout funds, and Obama’s ability to navigate a political minefield over the raft of tax concessions and spending cuts due to kick in on January 1.

At the centre of Obama’s plan is a Robin Hood style tax on wealthy Americans with annual earnings over $250,000 in an effort to “reduce the deficit by 4-trillion over the next decade. Specifically, Obama is calling for an extension of the Bush-era tax cuts to all except those earning above the threshold. “We can’t just cut our way to prosperity,” we have to combine spending cuts with revenue” Obama said, while urging the need for comprise and noting he is not “wedded” to every detail of his plan. Just as well given Republican opposition to Obama’s deficit reduction plan, and if the 2011 debt ceiling negations are any indication, the stoush may be long, arduous and result in little more than a band-aid.

Obama has launched his fiscal cliff offensive in a meeting with his political base today and will consult with business leaders on Wednesday in an effort to establish common ground with his Republican opposition.

Greece’s efforts may be rewarded with additional aid
While Eurogroup ministers may have agreed to provide Greece with a two-year extension to meet its debt to GDP target ratio of 120 percent by 2022, the decisions to unlock the next 31.2 billion euro bailout installment will not be made until the Eurogroup meeting on November 20. It is clear Greece has jumped through the hoops set by the Troika, hence, there is no reasons to suggest the funds are not forthcoming.

An article in the German publication, Bild, took it a step further overnight suggesting Germany was in favour of giving additional funds to Greece by bundling current and future bailout installments. The report suggested over 43 billion euros could be forthcoming, made up of 31.2 billion euros due for the second quarter, 5 billion for September and 7.2 billion due at the end of December. This helped the euro to regain some composure but gains were pared after the German finance ministry failed to confirm the reports. Nevertheless, we believe there may be some substance to these reports and no doubt markets will continue to mull over the likely hood of this ahead of the November 20 Eurogroup meeting.

Meanwhile, Germany’s ability to maintain economic composure in the face of peripheral weakness continued to come under scrutiny, with the latest ZEW survey showing economic sentiment slid to -15.7 in November from -11.5. The euro racked up 10 consecutive days of losses against the aussie, albeit by a small margin.

From the October high of 1.2825, the pair has lost just over 5 percent, with price action now easing below the 100-day MA signaling further bearish momentum. Technical’s also show the pair is closing in on the 61.8 percent Fibonacci retracement around 1.2075 from the August to October rally. The euro pared losses against the greenback overnight, bouncing off early fresh two-month lows of 1.2660 and currently support above 1.27-figure.

Across the Chanel, Consumer prices in the UK rose steeply in October with headline inflation rising 0.5 percent in October, or 2.7 percent in annual terms. Economists had anticipated an increase to 2.4 percent from 2.2 percent in September. Underlying or the core rate of inflation which excludes food, tobacco, alcohol and energy prices, increased to 2.6 in annual terms from 2.1 percent in September.

AUD finds support at 104 US cents
After flirting with 104 US cents late yesterday, support at the figure kept losses in check with reported sovereign bids fending off a deeper trough. Support ensued as European equities posted respectable gains and US equities remained buoyant. Local data on the docket today includes the third-quarter wage cost index, which is expected to show 0.8 percent growth or 3.8 percent on year.

Although not traditionally a major market moving theme, local pundits will be watching in the context of the RBA’s next move given its value as an early indicator of inflationary pressures. Earlier this morning we have the Westpac consumer confidence data series for November. Across the Tasman, markets will be watching the release of New Zealand retail sales data for October. At the time of writing the Australian dollar is buying 104.4 US cents.