Ahead of several major events over coming days including the Fed FOMC meeting, EU Summit and Japanese elections the market will continue to appear directionless. Indeed, there was little influence overnight, as markets digested news of Italian Prime Minister Monti’s resignation, with the reality that this merely took place earlier than expected limited any damage. Discussions on the fiscal cliff were ongoing but with no sign of breakthrough as officials noted that the lines of communication remain open.
On the data front the German ZEW survey will be the main highlight for Eurozone markets today, with a likely small improvement set to provide marginal relief to the markets. A conference call by the Eurogroup to discuss Greece is also on tap as any news about the progress of Greece’s debt buyback and aid tranche is awaited. In the US a small narrowing in the October trade deficit is expected but small business optimism is likely to have deteriorated in November. The data and events today will leave markets largely unperturbed.
EUR managed to recoup some of its losses after dropping to a low around 1.2880 versus USD which is a strong support level. EUR/USD continues to look like a sell on rallies, with any break above 1.3000 likely to find strong selling interest. A slightly firmer ZEW survey and potentially positive comments about Greece may help limit any pressure, however. USD/JPY continues to look stretched to the topside as indicated by extreme short JPY market positioning although reports that the Bank of Japan are preparing further monetary stimulus at its meeting next week will limit any retracement.
Asian currencies remain supported although the weaker CNY over recent days will likely undermine closely correlated currencies including KRW and TWD. Nonetheless USD/KRW dropped below the psychologically important 1080 level, with the Bank of Korea smoothing rather than stemming any appreciation in KRW. Markets remain wary of more regulations on the KRW while the weaker CNY will also contribute to acting to resist further KRW appreciation in the near term. The IDR was the major underperformer in the region but comments by the central bank governor about guarding the currency will fuel caution about further selling.