FOREX: Dollar, Yen to Pull Back as Super-Committee Selloff is Unwound

Talking Points

• US Dollar, Yen Decline as FX Markets Digest Yesterday’s Price Action
• S&P 500 Index Futures Rise, Hinting Sentiment Rebound to Continue
• Papademos, Juncker Press Conference in Focus on EU Debt Crisis Front

The safety-linked US Dollar and Japanese Yen edged lower in overnight trade, down as much as 0.2 and 0.5 percent respectively against their sentiment-linked counterparts as markets digested the previous day’s surge of risk aversion.Looking ahead, S&P 500 stock index futures are ticking narrowly higher, hinting more of the same ahead. This seems reasonable.

The selloff over the preceding 24 hours was attributed to the failure of the “super-committee” of 12 US Congressmen to come up with a deficit reduction plan by the self-imposed Monday deadline (although the official cutoff is November 23).However, as we discussed yesterday, the $1.2 trillion in automatic budget cuts triggered by the failure to reach a compromise don’t take effect until 2013, so the outcome’s practical near-term implications for growth, monetary policy, and thereby currency rates are essentially nonexistent. It should not be surprising therefore that risk appetite has an opportunity for a near-term recovery as this reality is priced in.

With little of note on the European data docket, traders will continue to watch the speaking schedule for updates on the Eurozone debt crisis. A press conference following a meeting of newly-minted Greek President Lucas PapademosandJean-Claude Juncker – the chairman of the Eurozone finance ministers’ meeting group and Prime Minster of Luxembourg – will be in focus. Speeches from Bank of Italy Director General Fabrizio Saccomanni and Budesbank President Jens Weidmann are also on tap. As we discussed in our weekly outlook, the focus remains on the role of the ECB in containing the rise in regional borrowing costs.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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