A complete lack of headline data and extremely thin markets kept the majors fairly range bound. EURUSD, AUDUSD and NZDUSD stuck relatively close to their opening levels. Gold and Oil were similarly range bound against the USD dollar. The yen was the biggest mover in Asia, once again, despite Japanese markets being on holiday.
The US fiscal cliff dominates sentiment
Overall, price action of late indicates investors are still clearly concerned about the inability of US politicians to reach an accord over the fiscal cliff. Even Boehner failed to generate support for his Plan B, the market was unsure about the ability of the republicans and the democrats to reach an agreement before the end of the year. The situation is being compounded by the holiday season, with a lot of house members taking time off. Hence, even if a new plan were to be proposed by either side it may have the votes to pass the upper house.
Abe continues to push the BoJ for a more aggressive policy stance
In Japan, equity markets were closed today, but the yen managed to gain some ground. USDJPY saw some profit taking due to low levels of volume in the market. The moves in the yen of late have been dominated by talk of more monetary easing by the BoJ. Incoming PM Abe has been very vocal about the need for a more aggressive BoJ, even going as far to say the LDP may rewrite the Bank of Japan Act if the bank doesn’t increase its inflation target to 2%, which would open the door for more aggressive policy loosening. By rewriting the BoJ Act the government could effectively bring the bank under its direct influence, thereby compromising the independence the BoJ has enjoyed since 1998.
Specifically, Abe stated he wants the BoJ to increase its inflation target at its next meeting in January, whilst also taking more responsibility for employment. The incoming PM has also stated that the BoJ should underwrite government debt, which could have the adverse effect of undermining confidence in Japan’s fiscal position.
Whatever happens, it is not clear that more central bank action is the answer. The structural problems in Japan, namely an ageing pollution and a somewhat uncompetitive global position may not be solved by opening the BoJ’s floodgates.
In other markets, gold didn’t manage to build on Friday’s gains, which were a result of safe haven seeking by investors on the back of the political standoff in the US. However, some gold producers in Asia continued to capitalise on this sentiment, particularly in China.
Not much expected from Europe
Heading into the London session, with Germany on a bank holiday and may market participants away from their desks’ we expect similarly flat trading conditions throughout the major markets. Also, we aren’t expecting any major Euro-crisis headlines that may rattle sentiment. Hence, we expect the market to say focused on the political wrangling in the US, which may result in some choppy conditions towards the end of the London session and as US markets come online.