The only real story appears to be the fiscal situation in the US and the diminishing prospect of a deal before the year end. It’s not quite a cliff, rather a very sharp slope, which starts on Jan 1st with the expiration of various tax cuts from previous years (USD 281bn) as well as the payroll tax holiday (worth USD 115bn), together with a series of other spending measures.
These on their own, together with the uncertainty regarding the eventual resolution (which is already impacting spending and investment decisions) would be enough to push the US back into recession. A downgrade of the sovereign debt rating of the US would also likely ensue in a matter of weeks. But perverse as it is, there’s still a decent chance that the dollar will gain into year-end on this scenario, but the yen will still be the main beneficiary overall.
Latest FX News
- JPY: Comments from PM elect Abe over the weekend again indicating preference for weaker currency and also saying that if BoJ does not adopt an inflation target of 2% at its next meeting, a policy accord will be set up to ensure this happens.
- AUD: Holding above 1.04, with weaker tone gained last week on fiscal cliff concerns holding in place.
- GBP: Hometrack survey showed house prices falling 0.1% in Dec, YoY at -0.3%.
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