Forex markets may be in for a quiet end to the trading week as traders wait for the weekend’s “fiscal cliff” talks before showing directional commitment.

Talking Points

FX Markets to See Muted Trade As Traders Wait for Fiscal Cliff Deal
Japanese Yen Hits New 20-Month Low as Data Bolsters Stimulus Bets

The spotlight remains on Washington, DC as financial markets return from the Christmas holiday, where US policymakers have a mere five days left to deliver a deal avoiding the so-called “fiscal cliff”, a set of tax hikes and government spending cuts due to trigger at the turn of the year. The Congressional Budget Office (CBO) projects the jolt of austerity will tip the US back into recession. The key inflection points are due over the weekend however, meaning traders may hold off on committing to a firm directional bias in the meantime. On balance, this seems likely to make for a quiet end to the trading week. With that in mind, the markets’ hyper-sensitivity to headlines coupled with thin holiday-season liquidity may make for choppy trade.

For forex markets, a fiscal cliff deal is likely to broadly weigh on the US Dollar amid ebbing safe-haven demand for the benchmark currency. A lone exception may be found in the greenback’s pairing with the Yen, where the focus remains on domestic policy. Indeed, the Japanese unit underperformed in otherwise quiet overnight trade, hitting a new 20-month low, after a disappointing economic data set reinforced the incoming government’s calls for an increase in stimulus. December’s Manufacturing PMI reading showed sector activity was shrinking at the fastest pace since April 2009. Meanwhile, Industrial Production figures returned a greater-than-expected decline at 1.7 percent in November.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

23:15

JPY

Nomura/JMMA Manufacturing PMI (DEC)

45.0

–

46.5