20131212

Good morning,

Risky assets were on the offer for the second day in a row in light of a new round of speculations regarding the US Fed tapering of asset purchases. Last evening, the US the monthly budget statement came out at -$135.2bn vs. -$145bn expected, which is the same as an almost 23% improvement this year, bringing  total deficit to $226.8bn for the first quarter of the fiscal year. Although an improvement, it also tells another story - that the Fed is getting closer to a pause of the quantitative easing. The question is as always "when?", but since the Fed has not communicated a clear policy, the market can only make its best guess, but since the impressive increase gains we have seen this year in especially US equities, cannot continue, should the Fed announce an economic tightening, leading to a potentially larger correction. Should today's US figures at 13:30 GMT (Jobless claims and Retail Sales) come out better than expected, then this should fuel tapering fears, which is why we could see a round of flight to quality, expecting the US Dollar to appreciate against its peers. EUR/USD has been bid for the last five days in a row and although the uptrend is strong, oscillators have become overbought, so unless the market is able to take out the October highs at 1.3832 (61.8% Fib in 2011 high -2012 low wave), then we could see a correction towards 1.3480-area.

Besides the tapering speculations, overnight, the RBNZ decided to keep interest rates unchanged at 2.5%, sending AUD/NZD to lowest levels in five years as the RBNZ remained hawkish and we could see a tightening in 2014. With this communication, we could see additional downside in the pair.

Today in Europe, French inflation figures came out as expected and Italian inflation will also receive attention from market players. At 10:00GMT, Euro zone Industrial Production will be released, expected to increase 0.3% MoM in October against a drop of 0.5% in September.