USD Pressured by Cliff Optimism

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The EUR has had a very small overnight trading range, as the USD remains pressured as traders are optimistic an agreement on the fiscal cliff is close at hand.  This optimism is being fueled by a meeting between President Obama and House Speaker Boehner.

Their differences have been drastically narrowed after President Obama responded positively to a proposal by Congressman Boehner that would add tax hikes for America’s wealthiest citizens.  President Obama responded by moving his position on tax hikes to households earning more than $400,000 as opposed to $250,000.  This is still below the Congressman’s request of a $1,000,000 level but there is “optimism in movement”.

The two gentlemen are also closing their gap on tax revenue proposals, as President Obama lowered his proposal to $1.2 trillion over 10 years compared with Congressman Boehner’s level of $1.0 trillion.  One major issue that still remains is how to raise the debt ceiling.  The President is looking for a two year increase, while Congressman Boehner is pushing for a one year increase.

All of this positive feeling allowed the DOW to move higher yesterday and those good feelings continued in Asian stock markets.  While the EUR and the JPY remained in tight ranges, traders are looking to add to “risk-on trades”, which should eventually see the EUR, GBP, AUD and CAD trade higher.

ECB President Draghi’s comments yesterday seemed to pass through the markets without much fanfare.  He noted in his speech that there had been “gradual improvement in financing conditions” during the second part of this year.  With this improvement, the ECB sees a “beginning of a recovery by the second part of next year”.  He also said that the “medium-term outlook for economic activity remains challenging”.  He also mentioned that monetary policy and banking supervision will operate independently of each other.  He said he expected that between 130 and 150 banks will be under “direct supervision”, while the rest will be under “indirect supervision”.  He said the challenge now will be implementing these systems.

The EUR had no real reaction to Draghi’s comments yesterday, but according to traders remains somewhat bid and a move towards the resistance at 1.3200 is expected this week.

The JPY remains under pressure as traders anticipate further easing will be announced by the Bank of Japan at their policy meeting on Thursday.  With the victory by the LDP party in Sunday’s elections, expectations are high that a policy shift to more aggressive easing will be seen on Thursday.  USD/JPY has tested 84.10 overnight and a break there will see a target of 84.40.  Support for USD/JPY remains at 83.80, then 83.50.

Commodity currencies are moving higher as well, with the AUD testing resistance at the 1.0560 level.  A break there will target 1.0625.  Support for AUD is at the 1.0520 level.  The Canadian Dollar looks to strengthen as well, with traders expected to target the .9830 level, with the eventual target being .9780.  Resistance appears at .9875.

I expect we will continue to see small currency movements as traders get closer to the Christmas holiday week.  The last major news event is the BOJ meeting and once that concludes on Thursday, all that will left for traders is waiting for the new year, when new trading budgets take affect and liquidity returns to the markets.

Further reading: EURO frustrates the buyers and the sellers

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About Author

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