ECONOMETER

Risk appetite was decidedly firmer overnight as hopes of a US budget deal grew. Talks between President Obama and Congressional leaders have been labelled as ‘constructive’ implying some sign of compromise although there is a long way to go before a deal is likely. Sentiment was boosted further by encouraging housing news out the US, with home builders’ confidence and existing home sales beating expectations. Unfortunately housing starts data today will not be as upbeat.

News that France’s credit ratings were cut by Moody’s dampened the mood, ahead of a meeting by Eurozone officials to decide on the fate of Greece’s EUR 31.5 billion loan tranche. The French downgrade may cast a shadow over markets this morning but hopes of progress towards a solution to the fiscal cliff will keep markets buoyed.

Data releases in the Eurozone will do little to help the EUR given expectations of weak purchasing managers’ indices and a yet another drop in the German IFO business confidence survey over coming days. News on the Greek front might be a little better if the country’s loan tranche is approved today. However, any boost to EUR sentiment will be short lived as discussions about Greece’s sustainability and disagreements among its creditors hog the limelight.

My quantitative models suggest little directional bias, with EUR/USD close to its short term fair value. While all of this suggests that the EUR will fail to find much momentum its worth highlighting that EUR short speculative positioning is at its highest since 11 September and a great deal of bad news is already priced in.

While the Bank of Japan is set to deliver more easing over coming months today’s meeting will likely mark a pause in policy. I do not expect any surprises from the Bank of Japan today but the JPY remains on the back foot in the wake of calls for “unlimited easing” by the opposition LDP party. However, the outcome of elections is by no means clear cut and although the LDP will likely garner the lion’s share of the vote its policies may be constrained by coalition partners.

I remain cautious of calling the JPY higher from current levels, especially given that USD/JPY will be undermined somewhat by the drop in US bond yields. Moreover, my quantitative model shows a sell signal for USD/JPY. Technical resistance around 87.78 will likely cap any up move in the currency in the neat term.