Currency Watch: 2012 draws to a close

The roadmap in markets for the rest of the year is starting to become clear. There are maybe four events between now and New Year’s Eve that we would categorise as “top tier” for rates; next Wednesday’s Autumn Statement from the UK, the Japanese elections, the publication and enforcement of the Greek debt buyback plan and efforts in the US to avoid the “fiscal cliff”.

Next Wednesday’s Autumn Statement comes at a good time for the Chancellor. The latest revision to UK GDP has confirmed a 1% growth rate in Q3, obviously emboldened by the Olympics and the bounce-back from the extra day off we had in Q2 for the Queen’s Jubilee.

He is also being roundly praised for his appointment of Mark Carney as the new Bank of England Governor in a bid to clear house in the “Old Lady”.

The statement is the perfect opportunity for Osborne to ease the tiller of the HMS Great Britain away from austerity and relax some of the fiscal tightening should he believe it necessary. However, we doubt he will do that. Persistent chatter around a credit rating cut for the UK has to be accounted for and is a risk to sterling in the short term, but we don’t believe that it matters a jot in the long term.

Market interest in the Japanese elections seemed to be based around expectations of inflation and monetary policy. Shinzo Abe, the leader of the opposition, has called for unlimited monetary policy easing (sound familiar?) and a huge increase in public spending to drive down the yen and boost GDP. Abe’s LDP party are favourites to take over from the incumbent DPJ on 16 December. Once again we would expect fallout in this to be limited to yen crosses.

The Greek buyback is due to be agreed by December 13th. Debt buyback allows Greece to buy its own debt and cancel it at a lot cheaper levels than holding until maturity; unfortunately given the increase in prospects for Greece in the past few months the price of Greek debt has increased from around 15c in a euro to around 35c in a euro, making the plan more expensive.

What is up in the air is how they do it. Must people participate and therefore, more than likely, take a loss on holdings of Greek debt? It’s one for the lawyers but the IMF has said that it will not pay its share of the latest bailout plan until it is decided.

And that leaves the US “fiscal cliff”. Negotiations are going to remain protracted through December but we doubt that policymakers allow things to get to out of hand. The legendary investor Warren Buffet summed up the feeling perfectly in an interview a few days ago by saying that Congress was “stupid but not suicidal”.

The market is pricing in a deal at the moment and disappointment would mean huge USD strength to open 2013. That much is clear.

Jeremy Cook is chief economist at World First foreign exchange