Last talks on “fiscal cliff” strengthen EURO

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President Barack Obama and lawmakers are launching a last chance round of budget talks just days before a New Year’s deadline to reach a deal to avoid a “fiscal cliff”: an increase of USD 600 billion of taxes and budget cuts to be automatically executed from January 1st if politicians fail to find a budget compromise. Obama and Vice President Joe Biden will meet with congressional leaders from both parties in the afternoon today. The news has for now strengthened risk appetite and Euro/USD is up.
The two political parties remained far apart particularly over plans to increase taxes on the wealthiest Americans to help close the US budget deficit. The coming days are likely to see intense bargaining over numbers or political theatre as each side attempt to avoid blame if a deal looks unlikely.
US stocks sharply cut losses and rose on news of the House reconvening as investors clung to hopes of an 11th –hour deal. Even a partial agreement on taxes that would leave tougher issues like entitlement reform and the debt ceiling until later could be enough to keep markets calm. US stocks recovered, but fell for a fourth day after a jittery session which saw a one % fall after Senate Majority leader, Henry Reid, initially warned that a deal was unlikely. Stock markets recovered and ended flat on news on new negotiations. Dow Jones ended down 0,14 % to 13 096 after a one percentage free fall in the opening of yesterday’s session.
Asian shares inched higher on signs that Washington is making a last ditch effort to reach a budget compromise. The USD/JPY fell to its lowest level in 2 years trading at 86,64, and Japanese stocks to 21 months high on expectations of drastic monetary easing. Australian shares rose to a 19 month high and are on track to post its strongest annual gain since 2009. Oil prices rose on hopes of a US political deal. Brent crude reached USD 111 a barrel.
EURO/USD has recovered to 1.3240 after falling to 1.3170 before Christmas on news of failed budget negotiations. A budget settlement will create renewed optimism for continued US economic growth and increased risk appetite which will strengthen the Euro and smaller currencies. Australian dollar hit a 20-month peak against the yen at 89,93 and is also up against the USD.
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