Pressure remained on the USD overnight as the market expects the Federal Reserve Bank to act this week after their two day meeting that begins today. This pressure is allowing the EUR to remain bid. It seems the markets are more interested in the FED action at the time being than on what is happening politically in Italy. Adding to the USD concerns as we head towards mid-week are the ongoing negotiations regarding the fiscal cliff. Both Republicans and Democrats remain adamant that their side is right and so far refuse to budge. For those keeping score, we are less than 20 days to the “cliff”.
In Italy, Prime Minister Mario Monti is confident that his resignation will not create a “decision making void”. He said he is confident that the Italian elections will provide a coalition government that will be “highly responsible, EU-oriented and in line with the efforts already being pursued by Italy. PM Monti is preparing to resign after the 2013 budget is approved by Parliament. Elections are expected to be held in February on either the 17th or the 24th.
The EUR had a quiet range overnight as the markets not only await the FED meeting decisions tomorrow but also the release of German and EMU ZEW surveys later this morning. It is expected that the Euro zone ZEW will move back into positive ground after showing a -2.6 result in November. The central currency moved towards the 1.2970 resistance area before easing off, while the low of 1.2928 kept markets calm.
The Bank of England’s governor Merlyn King made comments this morning that he is concerned that 2013 could be the year when a number of countries look to ease their currencies in an attempt to use managed exchange rates as a way to direct domestic monetary party. He noted countries such as Brazil, Turkey and the Czech Republic as countries already manipulating their currencies. He also commented that he expects his successor, present Bank of Canada Governor Mark Carney to do an excellent job.
Getting back to the FOMC meeting, economists are expecting the FED to add further stimulus. The FED’s Operation Twist is scheduled to end this month. Operation Twist added $45 billion of short term Treasury purchases each month and while this will end, another form of FED purchases is expected to be announced. The FOMC begins their two-day meeting today and will issue their policy statement tomorrow at around 12:30 PM, EST. The announcement will also include forecasts for growth, unemployment and inflation. FED Governor Bernanke will then hold his usual press conference at 2:15 pm. His comments as always will be closely watched by market participants.
The Canadian Dollar continues to strengthen after the Canadian government approved Chinese controlled Cnooc Ltd bid to take over Nexen Inc. PM Stephen Harper stated this move would not become the “norm”, and that further investment in Canada’s energy sector would only occur under “exceptional” circumstances. The USD/CAD once again has tested the .9860 support level, but the bounce this time only went as high as .9880. I expect another test of .9860 and eventual target of .9820 tested in the next few weeks.
Remaining in North America, the Mexican Peso has strengthened as well on hopes that US leaders will avert the fiscal cliff allowing for Mexico continue exporting to the US. The US is the main trading partner of Mexico as the Latin American country sends about 80% of their exports “north of the border”. USD/MXN is presently caught in a tight 12.78 – 12. 81 range.
As I complete this report, the German ZEW has been announced. The December economic sentiment index came in at +6.9 after a November index of -15.7. The EUR has jumped above the 1.2970 level following the release. We will see what the EU ZEW shows shortly.
With concerns over the FED meeting as well as pretty decent numbers coming out of Europe on these ZEW numbers, expect the EUR to remain with its bid tone over the next few days.
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