Forex Analysis: Dollar, Yen Aim Higher as Fiscal Cliff Fears Escalate

The safe-haven US Dollar and Japanese Yen may rise as failure to reach a deal avoiding the so-called “fiscal cliff” shatters confidence across the markets.

Talking Points

Dollar, Yen Aim Higher on Haven Flows on Swelling “Fiscal Cliff” Fears
Pre-Holiday Liquidity Drain, “Quadruple Witching” May Boost Volatility
Supportive US Economic Data to be Overshadowed by Budget Deal Woes

Risk sentiment appears to be crumbling as expected amid a lack of progress in US “fiscal cliff” negotiations. Divergent headlines pulled markets in opposing directions throughout the week but confidence began to crumble in earnest as plans to vote on the so-called “Plan B” – a unilateral Republican initiative aimed at raising taxes on millionaires – failed to secure enough support to warrant a vote. S&P 500 index futures are pointing sharply lower in late Asian trade, down nearly 1.6 percent having spiked down over 3 percent as the “Plan B” failure crossed the wires.

This makes for an ominous sentiment signal as markets head into the final hours of the trading week, hinting a sharp pick-up in risk aversion is brewing. Volatility may also prove unusually intense as liquidity dries up ahead of the Christmas holiday. “Quadruple witching” – the simultaneous expiry of stock index futures, stock index options, stock options and single stock futures – may complicate market conditions further. Continued risk aversion is likely to boost the US Dollar and Japanese Yen against their major counterparts.

The final revision of third-quarter UK GDP figures headlines the economic calendar in European hours, with forecasts. Later in the day, the spotlight shifts to a busy US docket. November’s Personal Income and Spending figures as well as the Durable Goods Orders report are all due to cross the wires, with narrow improvements expected on all fronts. A revision of Decembers University of Michigan Consumer Confidence figure is also on tap. Here too, forecasters are pencilling in a slight upgrade. Cheerful economic news can hardly be expected to meaningfully underpin sentiment however absent a breakthrough on the “fiscal cliff” side of the equation.

Asia Session: What Happened

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