Putting the brakes on the CNY

Markets are becoming increasingly headline driven, with risk appetite gyrating on any fresh lead on fiscal cliff developments. Initially risk assets dropped in the wake of weaker than expected US new home sales data and renewed fiscal cliff concerns but reversed course following more encouraging comments from US House speaker Boehner and President Obama who both indicated that a deal was moving closer to fruition. The comments also sparked a drop in the USD while gold prices came under pressure.

Meanwhile, Eurozone peripheral bond spreads continue to tighten in the wake of the Greek debt deal as tail risks continue to decline. An Italian debt auction may test the market’s new found confidence today. Incidentally the deal will be put to the vote tomorrow in Germany. Data releases are generally taking a back seat to fiscal cliff developments but once again there will be stark contrasts between Europe and the US, with weakening economic sentiment indicators in Europe on the one hand and an upward revision to US Q3 GDP on the other.

Currencies will continue to track the gyrations in risk, but in large part remain in well defined ranges. EUR/USD reversed its losses as fiscal cliff resolution hopes grew but will struggle on the top side. Comments by Moody’s in its credit review on Greece released this morning will also dent EUR sentiment with the ratings agency noting that Greek debt remains unsustainable even after the country’s debt deal. EUR/USD resistance is seen around 1.3023 while support around 1.2870 is expected to hold over the near term.

USD/JPY pushed back above the 80.00 level overnight but I would prefer to sell the currency pair on any run up to 82.50. While weak data such as the bigger than expected decline in October retail sales (-1.2% YoY) highlight the need for more aggressive policy, the “Abe” effect has largely been discounted and markets may wait for elections on December 16 before deliberating on further JPY direction. Ultimately I remain JPY bears but in the near term the up move looks overextended.

China has put the brakes on the CNY as fixings have been less strong over recent days. Given the strong correlation with many other Asian currencies this is resulting in more restraint across the Asian FX spectrum. The most impacted currencies will be the KRW and TWD, as they possess the highest sensitivities to CNY. A slowing in the pace of portfolio inflows, with notably South Korea and Indonesia seeing outflows of equity capital over the month, will also restrain Asian currencies.

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