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Monetary and currency policies will remain a very important focus following the Federal Reserve decision to sanction additional quantitative easing during 2013 and further action by the Bank of Japan. There will be further unease over the implications of currency gains and resistance is liable to increase which will risk fuelling a more aggressive phase of currency wars as central banks look to resist currency appreciation. Key events for the forthcoming week
Dollar: Fiscal policy will remain important in the short-term as fiscal talks continue and there is likely to be a deterioration in risk appetite which would support the Dollar if there is no progress. The Federal Reserve stance will remain an important focus throughout the next few months and the dovish policies will have a negative impact on the US currency as the Fed continues its policies of bond purchases. There will still be expectations that the US economy will out-perform the Euro-zone which should provide some degree of dollar support. There has also been a retreat in precious metals prices which suggests that underlying dollar selling is likely to be contained. The dollar remained on the defensive for much of the week, but did find some respite as risk appetite faded again as the Euro retreated from the 1.33 area. Regional Fed Presidents Lacker and Fisher continued to voice opposition to the recent additional quantitative easing. There were, however, strong expectations that the dovish view would prevail, especially with the doves maintaining a strong position on the 2013 FOMC which will keep policy loose. The US current account deficit narrowed to US$107.5bn from a revised US$118.1bn the previous quarter. As a percentage of GDP the deficit was below 3.0% compared with a peak above 6% of GDP in 2005. There is the potential for a medium-term decline in the deficit as the energy deficit narrows and the US currency will be slightly less vulnerable to underlying selling. The US jobless claims data was slightly weaker than expected with an increase to 361,000 in the latest week from a revised 344,000 figure the previous week. The other releases were stronger than expected with the third-quarter GDP estimate revised up to 3.1% from 2.7%. In addition, there was a stronger than expected reading for existing home sales at 5.04mn from 4.76mn the previous month while the Philadelphia Fed index increased to 8.1 from -10.7 the previous month. US budget negotiations remained an important focus as the House of Representatives debated the so called ‘plan B’. Speaker Boehner insisted that the House had the votes to pass the bill while President Obama stated that it would be vetoed. As the vote deadline approached, Boehner admitted that he did not have enough support and the vote was cancelled as some Republicans refused to back any tax increases. Further votes are not scheduled until at least December 27th which triggered a sharp deterioration in risk appetite on fears that the year-end deadline would be missed. Markets still expect that a compromise deal will be reached eventually which helped cushion the impact, but sentiment could deteriorate sharply if deadlock persists
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