The US dollar is responding to headlines regarding the fiscal cliff. The buck is currently reversing earlier gains after reports that the US House is planning an evening session on December 30. Pessimistic comments by Senate Majority Leader Reid suggesting that it looks like the country is headed “over the cliff” sent risk sentiment lower and gave a boost to the greenback earlier in the session. Budget negotiation headlines continue to dictate market sentiment and when headlines suggest a deal is unlikely US treasury yields and equities fall while the USD rises. Alternatively, when markets take an optimistic view, equities tend to rally, yields rise, and the dollar declines. Today’s price action in response to the various headlines underscores this dynamic.
Housing and labor data improve while confidence declines
Economic data released in the US showed continued improvement in the housing market and better than anticipated labor market figures while confidence disappointed as fiscal uncertainties weigh on sentiment. Weekly initial jobless claims fell by more than expected to 350k (cons. 360k) from the prior week’s 362k print. The 4-week moving average in initial claims fell to 356.8k – the lowest level since March 2008. New home sales increased by more than forecast with a monthly growth of 4.4% to 377k. Growth was strong despite a below consensus print as the prior week’s figures were revised lower to 361k. Conference Board consumer confidence dropped by much more than anticipated in December to 65.1 (cons. 70.0) from a downwardly revised 71.5 in the prior month.
Abe’s Cabinet gets to work
The Japanese yen continued its descent amid reports that the new Cabinet under Prime Minister Shinzo Abe is working on a comprehensive plan to fight a strong exchange rate. USD/JPY pushed above the 86.00 level, however the move looks to be nearing over-extended levels and a pullback looks increasingly likely. We would caution against going against the recent trend of JPY weakness and would view corrections in JPY-crosses as opportunities for further yen weakness as Japanese officials’ plans take shape.
US equities are well off the lows but remain in negative territory as the probability of a deal before the end of the year remains slim. UST yields are lower across the curve and commodities are slightly higher.
Data watch: Japan inflation in focus
Japan will see a slew of economic data releases tonight and the key report will be inflation figures. November national CPI and December Tokyo CPI readings are due and expected to show persistent deflation. This will lend support to recent rhetoric from Japanese officials that more needs to be done in order to overcome deflation and get the economy back on track.
Japan’s November jobless numbers, labor cash earnings, retail trade, and preliminary industrial production figures are also due as well as weekly investment securities data. China sees the release of the November leading index and December business sentiment.