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Fiscal Blame Game Weighs on Markets

The Bank of Japan, to no one’s surprise, expanded their asset purchase program by JPY 10 trillion and left their overnight call rate unchanged at 0-0.10%. The BOJ kept the credit lending program unchanged at JPY 25 trillion and maintained the inflation goal at 1%.

This was somewhat in defiance of newly elected Prime Minister Shinzo call for doubling the inflation target to 2%.   After the announcement, the USD/JPY moved lower falling below the 84.00 level and testing the 83.85 support level.   The USD/JPY is currently trading in the 83.95 range.

After threatening yesterday to make a run at the 1.3300 level, the EUR reversed and traded lower overnight making a run at the 1.3200 area overnight.   The sell off began during the Wednesday North America trading afternoon as traders eased away from risk trades in response to the lack of progress being made by the US in fiscal cliff negotiations.   After the White House announced yesterday afternoon that President Obama would veto Speaker Boehner’s plan B, the stock market moved lower and the USD moved higher.   Technically, the EUR/USD is supported at 1.3185.   After reaching overnight lows, the EUR has retraced early this morning to the 1.3230 area.

Adding to the oernight pressure on the EUR were comments made by Greek Finance minister Yannis Stoumaras that Greece could still be forced out of the Eurozone if it is unable to implement the tough fiscal reforms it has promised.   He added that he hopes for progress in 2013.   These comments have taken away from the positive signals given off by S&P the other day when they raised Greek ratings and also from the improving Greek bond market.   Ten year yields on Greek bonds were at 11.7% yesterday, after reaching a high of 30% at the end of May.   Sometimes you just have to wonder about these politicians who feel the need to comment, knowing their comments will affect the moves in the currency markets.   EUR resistance is now set at 1.3260, with support  at the aforementioned 1.3185 level.

Another day, and another step closer to the fiscal cliff.   Apparently negotiations have deteriorated over the 24 hours.   As stated earlier, the President said he would veto Plan B, Republicans are hurling insults towards the White House say their plans are growing more irrational by the day, and Speaker Boehner now is pointing blame directly on President Obama, saying if he doesn’t accept the GOP proposal it will be his responsibility for the “largest tax increase in American history”.   Expect to see many more Congressman facing the cameras today on CNBC and Bloomberg TV voicing their comments and pointing fingers at each other.

In other currency news, the USD/CAD moved higher overnight, testing resistance at the .9890 area.   A break of the .9895 resistance, could see a test of the .9935 level.   Support is at .9865, with a break there retesting the .9825 area.

Look for continued range trading as all we can do is wait for the resolution of the fiscal cliff negotiations.

Further reading:  Volatility Likely to Pick Up in Early 2013

Matthew Lifson

Matthew Lifson

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.