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Forex Analysis: Dollar, Yen Fall as Markets React to Fiscal Cliff Deal

Forex Analysis: Dollar, Yen Fall as Markets React to Fiscal Cliff Deal

Ilya Spivak, Head Strategist, APAC

The safe-haven US Dollar and Japanese Yen tumbled as risk appetite swelled after US lawmakers reached a last-minute deal avoiding the dreaded “fiscal cliff”.

Talking Points

  • US Dollar, Yen Plunge as Risk Appetite Swells on “Fiscal Cliff” Compromise
  • Status-Quo Eurozone PMI, German CPI Data Unlikely to Derail Momentum
  • Risk-On Mood May Find Added Fuel in December’s ISM Manufacturing Data

The US Dollar and Japanese Yen plunged overnight after the US Congress reached a last-minute deal averting the so-called “fiscal cliff”, scattering fears of a sharp austerity shock in the world’s largest economy and denting demand for the go-to safe haven currencies. The Senate voted in favor of the compromise measure by an overwhelming 89-8 margin in the early hours of Tuesday morning in Washington, DC. The House of Representatives followed suit by the evening, passing the measure with a 257-167 vote.

The so-called American Taxpayer Relief Act of 2012 delayed “sequestration” budget cuts created in 2011 by two months to give additional time for negotiation. Meanwhile, a broad-based increase in taxes was averted, instead allowing rates on incomes over $400,000 for individuals and $450,000 for families to increase from 35 to 39.6 percent. The bill also marked a phase-out of tax deductions and credits on incomes over $250,000 and the expiry of the payroll tax cut put in place in 2010.

European stock index futures are trading sharply higher in late Asian trade, hinting the risk-on mood is likely to carry forward as traders return from the New Year holiday. Final revisions of December’s Eurozone Manufacturing PMI data set and a preliminary look at German CPI headline the economic calendar. No major changes are expected on either front, seemingly leaving little to stand in the way of existing momentum. The US ISM Manufacturing report may reinforce the chipper mood later in the day, with forecasts pointing to a return to expansionary territory with a print at 50.4 in December after a disappointing 49.5 result in the prior month.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

1:00

CNY

Manufacturing PMI (DEC)

50.6

51.0

50.6

22:30

AUD

AiG Performance of Manufacturing Index (DEC)

44.3

-

44.3 (R+)

23:00

AUD

RPData-Rismark House PX Actual (DEC)

-0.3%

-

0.0%

23:44

CNY

Leading Index (NOV)

100.21

-

100.37 (R-)

5:30

AUD

RBA Commodity Price Index (DEC)

89.2

-

88.3 (R+)

5:30

AUD

RBA Commodity Index SDR (YoY) (DEC)

-8.0%

-

-10.3% (R+)

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

8:45

EUR

Italian PMI Manufacturing (DEC)

45.3

45.1

Low

8:50

EUR

French PMI Manufacturing (DEC F)

44.6

44.6

Low

8:55

EUR

German PMI Manufacturing (DEC F)

46.3

46.3

Medium

9:00

EUR

Euro-zone PMI Manufacturing (DEC F)

46.3

46.3

Medium

9:30

GBP

PMI Manufacturing (DEC)

49.1

49.1

Medium

13:00

EUR

German CPI (MoM) (DEC P)

0.7%

-0.1%

High

13:00

EUR

German CPI (YoY) (DEC P)

1.9%

1.9%

High

13:00

EUR

German CPI - EU Harmonised (YoY) (DEC P)

1.9%

1.9%

Medium

13:00

EUR

German CPI - EU Harmonised (MoM) (DEC P)

0.7%

-0.2%

Medium

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3181

1.3301

GBPUSD

1.6220

1.6366

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

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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