Risk assets rally as optimism grows over a resolution to fiscal cliff

Tom Tong29/Nov/2012Currency Updates

GBP

The pound fell 0.2 % on the day dragging it below the three week high that occurred on Tuesday. Sterling declined against a stronger dollar on Wednesday and could continue to do so due to U.S fiscal problems. This could also potentially derail U.S and global growth. There is also a possibility that the U.K may lose its triple A-credit rating which would put pressure on Sterling.

B.O.E Governor Mervyn King speaks today at 11:30 and it will be interesting to see how that could affect sterling. Another worry is the struggling economy as the B.O.E has cut its growth forecasts for 2013.

EUR

Now that investors are done worrying about whether or not Greece will get it’s next round of emergency aid, they’ve moved on to worrying about how it will meet it’s debt deal requirements and the new reforms needed to meet those requirements.

Greece will have to make some serious changes to it’s level of taxation and spending, which invariably will lead to increased animosity amongst Greek citizens. It must be stressed that the debt deal does not save Greece from its economic problems. Finance Minster Yannis Stournaras said that Greece’s debt buy back plan, a key aspect of the bailout deal, must succeed. In his first major speech since a deal earlier this week, Stournaras said the offer would be attractive to bond holders. Market players, however, remain concerned about Greece’s ability to fully implement a debt buy-back.

Moreover, in order to comply with European Comission Spanish banks restructuring plans have agreed to a massive downsize in exchange for an injection of public money. In order to recieve a 40 billion euro recapitalisation boost, they must cut their balance sheet by 60%.

USD

There is optimism in the markets as the $600billion fiscal cliff looks like it could be avoided which has sent the dollar index lower pushing the currency lower against most major currencies and this appears to be the major selling catalyst for the dollar.

The dollar is now just 0.5% from the months low versus the euro and this afternoon the Treasury secretary meets congress regarding the fiscal cliff. There is belief in the markets that the dollar could gain in the short term but not in the longer term depending on the resolution on the fiscal cliff. We have also seen the dollar decline against the safe-haven Yen.

There is third quarter gdp figures coming out this afternoon with expectations for a 2.8% reading. As well as USD CPE forecasted to be unchanged at 1.3%.

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Written by Tom Tong

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