Tedious EURO Year-End Trading

The deeper we go into the holiday season the more tedious Capital Markets seem to become. Thankfully, amid progress in the US budget negotiations, we have some signs of life before investors finally decide to ‘check-out’ for another year. Signs of progress in the US fiscal cliff negotiations is supporting ‘risk’ sentiment for the moment or until at least some year-end squaring and revaluations provide for some puzzling movements in the coming sessions.

So far this morning, global bourses, German Bund yields and commodity prices have managed to climb as both US political parties characterize progress in debt talks. Yesterday, President Obama and House Speaker Boehner held their first face-to-face talks since Friday. The market is reading this as a breakthrough in negotiations that could end the stalemate between the Republicans and Democrats.

The “Big” dollar has managed to maintain its gains against Yen, adding to yesterday’s initial reaction to Japan’s weekend general election results. Investors remain cautious ahead of some of Japan’s key trade data later this evening and the BoJ policy meeting outcome on Thursday. The LDP scored a comprehensive win on Sunday, forcing a major sell off in Yen on investor’s belief that the new Prime Minister, Shinzo Abe, would continue to pressurize the Japanese central bank into more aggressive policy measures to help boost the economy. A number of analysts expect the BoJ to expand its asset-purchase program at its next meeting later in the week.

So far, the dollar has managed to appreciate +5.1% against the Yen over the past month. This has certainly been a one-way directional trade, fueled by the Yen bears belief that a Government will speed up an aggressive monetary easing policy. Currently, the lack of deep dips is leaving some bears very confident about their dollar ‘long’ positions. Spare a thought for the hapless BoJ, they have been easing all year and have put little dent into the Yen’s persistent strength. What can they do that will have a material effect? Buy foreign bonds perhaps? This is certainly a solution and one that would garner strong resistance from the MoF and the Japanese government.

Official UK data this morning showed that inflation held steady last month, especially as faster food and household bills were offset by a steeper fall in fuel prices from a year ago. On the year, consumer prices rose +2.7% in November, the same rate as the previous months yearly change. Month-over month, inflation progressed +0.2% and very much in line with expectations. Typically, poorer harvests are to blame for the rise in food prices while falling crude managed to negate some of this positive effect. UK annual inflation continues to peak higher than the BoE desired +2% threshold. However, policy rhetoric seems to be acknowledging higher inflation levels for the next couple of years, which could limit the scope for further stimulus right away from the new Canadian ‘Guvnor’ starting in the summer. However, core-inflation (ex-food and energy) remains steady at +2.6%, m/m.

So far the ‘single’ currency remains unaffected by negative data and continues to climb as we go deeper into the holiday season. The EUR bulls are betting that the single unit could grind to 1.34 as the bears have been left battered chasing a falling EUR this quarter. There are no signs that the market is a willing selling of EUR’s ahead of year-end, thus leaning towards a painful grind higher to a resistance level where there is common interest to want to sell the single currency outright. Daily momentum remains positive, highlighting the overall upside potential. The first resistance of choice is around 1.3280. A continuing rebalancing of investor portfolios favoring European assets cannot be excluded in the coming months.

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EUR’s Teflon Capabilities

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