The US Dollar and Japanese Yen fell as risk appetite firmed Asia but returning fears about American fiscal policy may renew demand for the haven currencies.

Talking Points

US Dollar, Japanese Yen Sink as Asian Stocks Rise on China GDP Outlook
Sentiment May Unravel as Event Risk Lull Turns Focus on US Austerity Fears

The Japanese Yen and the US Dollar pushed broadly lower in overnight trade as stocks advanced, sapping demand for the go-to safe haven currency. The MSCI Asia Pacific regional benchmark equity index (excluding Japan, where markets are closed today) added 0.3 percent. Chinese shares led the push higher, which the newswires attributed to expectations of a pickup in economic growth to be revealed in fourth-quarter GDP figures on tap on Friday.

S&P 500 futures are pointing higher, hinting at more of the same ahead as risk appetite continues to find support. The durability of the advance seems suspect however amid a lack of catalysts to maintain momentum. The European and US economic calendars are quiet, with a narrow increase in Euro Zone Industrial Production (whose implications for markets are at best limited on the heels of the ECB rate decision) amounting to the only bit of mention-worthy event risk. The corporate earnings docket is likewise quiet.

Chinese GDP expectations in and of themselves seem an unreliable driver of lasting optimism. Indeed, as discussed in our weekly forecast, leading indicators have amply foreshadowed the recent stabilization in Chinese growth and asset prices have reacted accordingly.This means that a truly dramatic upside surprise on the growth figure is probably needed to yield something beyond what is already priced in and produce a substantial advance.

While inertia can be a potent trend-setter for asset prices – arguing for the risk-on scenario simply because it has been the dominant theme recently – markets may alternatively rethink the balance of dangers ahead given a lull in headline-grabbing event risk. The gravest uncertainty yet to be resolved is the degree to which US austerity will endanger the global recovery. The headwinds from tax hikes seem relatively mild compared with what could have been if the last-minute “fiscal cliff” deal was not made, but the spending side of the equation remains in flux as debates over the “debt ceiling” and the “sequester” loom.

Considering the danger posed to global growth by sharp retrenchment on the US fiscal front in an environment where Europe remains in recession, some corrective risk aversion seems in order. Positioning seems to reinforce at least the fruitful nature of the current environment to such a scenario after the S&P 500 has shot up to a four-month high along a nearly vertical trajectory.

Asia Session: What Happened

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