Forex Market Review And News Calendar For December 31 ~ January 4, 2013

In a shortened trading week, market was mostly driven by uncertainties surrounding the US Fiscal Cliff, as sentiment rose on the slightest hint of a possible budget deal, and dropped to the lowest levels in weeks on speculation that perhaps there will be no deal by the end of the year;  towards the end of the week, markets were left in suspense as a final last-ditch effort by the President and the Congress came in the form of a Sunday evening session, in the hopes that an agreement may be reached by then…  Analysts now are calling for about 15% of chance for a deal before January 1, as Republicans have implied that the “real” deadline for the fiscal cliff is at the end of February/March, and this new revelation helped to drive sharp losses in the equity market by Thursday.

Additionally, data surfaced this week indicated that the impending fiscal cliff pressure may have had a stronger impact on consumer behavior than previously believed as the US Consumer Confidence reading came worse than forecast, showing that holiday retail business started to dry up in the week ahead of Christmas.  Furthermore, East Coast snow storms added to the momentum as the US Conference Board noted that the December data could be downwardly revised due to smaller sample sets.

In the Foreign Exchange front, USD and JPY were generally weaker against the European currencies due to concerns about budget negotiations in Washington; however,  as traders started to focus on the potential for a US sovereign rating downgrade in early 2013 after Moody’s sounded the alarm, risk sentiments changed from risk appetite to risk aversion, thus driving the market to consolidate on the losses of both USD and JPY as traders look for excuses to take profits.

In Japan, yen continued to trend softer after PM-Elect Abe vowed legislation to revise Bank of Japan mandates if it did not adjust its inflation target to 2%. The new Japanese government maintained its strong rhetoric into late week and the Japan Chamber of Commerce expressed his view that USD/JPY would stabilize between the ¥85-90 level, but does not rule out the fact that USDJPY could reach ¥110-120 range. USD/JPY hit fresh 28-month highs above ¥86.60 and the EUR/JPY cross hit 16-month highs of ¥114.70 during the week.

In China, the equity market closed the week at a 6-month high as further signs of recovery in the manufacturing sector drove market sentiment. News out of China National Bureau of Statistics reported November industrial profits for large firms rising 22.8% y/y – well above the 20.5% growth seen in October and the 7.5% increase in September added momentum to the risk appetite sentiment.

In conclusion, with the uncertainties surrounding the US Fiscal Cliff, USD may remain neutral to bullish, as traders evaluate between the potential sovereign downgrades versus an accommodative Fed policy.  I’d recommend to stay away from shorting the USD during early week, especially with the long weekend in the mix.  EUR and GBP are likely to remain neutral, thus driven by news out of US, which means it is probably best to stay away from them as well.  JPY is likely to remain under pressure, therefore I’d recommend to SELL JPY on any rally; and with the US situation coming to an end on January 2, if we do see a strong risk aversion flows (strong JPY), it is probably best to wait until end of the day and then get it, as the overall trend for the JPY should remain unchanged in the medium to long term, all you need is patience.  CHF, CAD, NZD, and AUD are all off limits (stay away),  as the market will be waiting for a news catalyst for direction, which means we should be focusing on the US NFP on Friday.

Here is the list for tradable releases for the week:

  1. Wed January 2, 2013 – 4:28am EST – UK Manufacturing PMI
  2. Wed January 2, 2013 – 10:00am EST – US ISM Manuf. PMI
  3. Thu January 3, 2013 –  8:15am EST – US ADP NFP Change
  4. Fri January 4, 2013 – 4:28am EST – UK Services PMI
  5. Fri January 4, 2013 – 8:30am EST – US Nonfarm Payroll
  6. Fri January 4, 2013 – 8:30am EST – CA Employment Change
  7. Fri January 4, 2013 – 10:00am EST – US ISM Non-Manuf. PMI