US Events Pushed Dollar Index And Stocks Sharply Higher

A couple of major events in US were the major focus last week and drove both stocks and dollar index sharply higher. The so-called fiscal cliff agreement was finally reached which initially sent dollar lower on risk appetite. But the move then quickly reversed as dollar rebounded. The much less dovish FOMC minutes then gave dollar a strong boost against European majors, which was then followed by a solid employment report.

In the end, while S&P 500 was limited below 1474.51 resistance, the close at 1466.47 was the highest since 2007. Yen remained the weakest currency last week. European majors were broadly lower against other major currencies while commodity currencies outperformed following stocks.

Technically, upside momentum in yen crosses remained generally strong as persistent selling in yen continued. AUD/JPY has indeed taken out an important resistance level at 90. More downside would be seen in European majors against the dollar in the near-term but the current move is viewed more as a correction only and downside would possibly be limited.

More upside is favored in commodity currencies against the dollar but recent moves in USD/CAD and AUD/USD are also corrective looking and thus we might see dollar bottoms against the aussie and loonie in the near-term. So overall, for near-term trade within one or two weeks, long AUD/JPY should be considered for 100 psychological level. But we'd be cautious on bottoming in dollar. And should that happens, we're then prefer to switch from AUD/JPY long to USD/JPY long.

Late at night on January 1st, the House passed the fiscal cliff bill by 257-167 bipartisan vote, which was earlier passed by Senate 89-8. The compromised deal was worked out by Vice President Biden and Senate Minority Leader McConnell. Based on the deal, tax would be the same for most Americans while tax rate would jump from 35% to 39.6% on families earning over $450k per annum, or over $400k for singles.

The level was raised from Obama's threshold of $250k. Nonetheless, it's somewhat addressed by an itemized tax deduction cut for singles making over $250k and families making over $300k. Unemployment insurance would be extended for a year for up to two million people. Meanwhile, the issue of spending cuts was not addressed in the package.

Focus would possibly turn to the so called "debt ceiling" in the coming weeks. Republicans have already made it clear that they will press for dramatic spending cuts in exchange for raising the $16.4T federal debt ceiling. Such a ceiling has already been hit and it's estimated that the "extraordinary measures" for funding federal operations could only buy around two months time for negotiations.

House Speaker Boehner is insisting that any increase in debt ceiling should be offset by an equivalent spending cut. Meanwhile, President Obama proposed that the president could unilaterally raise the limit unless being overridden by two-thirds majority in Congress. Treasury Secretary Geithner even goes further and suggested eliminating the debt ceiling.

FOMC minutes for the December meeting revealed that policymakers were split on the timing to end asset purchases, signaling the possibility of terminating the program by the end of 2013. As mentioned in the minutes, "a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases."

Some even thought that the central bank should to slow or to stop purchases well before the end of 2013 "citing concerns about financial stability or the size of the balance sheet". Financial markets were disappointed by the minutes with stocks and commodities losing ground while USD extended gains.

Economic data from the US were generally positive. The NFP report showed 155k job growth in December versus consensus of 145k while November's figure was revised up from 146k to 161k. Unemployment rate was unchanged at 7.8% while November's figure was revised up. ADP employment reported showed strong 215k gain in December. ISM non-manufacturing index rose more than expected to 56.1 in December. ISM manufacturing index also rose slightly more than expected to 50.7 in December.