Major Currency Pairs Analysis: December 27, 2012

EUR/USD
European shares closed provisionally lower with investors opting to trim positions in the absence of a resolution to U.S. budget talks. The FTSEurofirst 300 closed down 0.1 percent, at 1,138.14 points, still just a few points shy of an 19-month high of 1,144.15 hit last week. The eurozone's blue chip Eurostoxx 50 index and France's CAC 40, which are trading around 16-month highs, closed down 0.1 percent and 0.2 percent respectively.

Spain's IBEX finished up 0.1 percent and Britain's FTSE 100 index was up 0.2 percent; they are both at around 9-month highs. After shunning European assets most of the year because of fears the crisis would lead to a break-up of the eurozone, investors have shown an appetite for European stocks recently, and the euro rose up to 1.3230 against the U.S dollar.

GBP/USD
Britain's FTSE 100 index is seen edging up by around 2 points, or 0.03 percent higher, according to financial bookmakers. Bookmakers expect equity markets to hold on to recent strong gains, although rises will be limited by lingering worries about an impasse in U.S. budget talks. The pound depreciated to 1.6135 against the U.S dollar.

USD/JPY
The yen slid to a 16-month low against the euro before data tomorrow that may show a decline in Japan’s consumer prices, fanning speculation Prime Minister Shinzo Abe will push the central bank to boost cash infusions. The currency touched the lowest since September 2010 versus the dollar after Abe said in a media briefing yesterday that “bold" monetary policy is one of the three pillars of his economic measures.

Implied volatility on U.S. stocks jumped to a five-month high yesterday, supporting demand for safer assets. The birth of the Abe administration is spurring expectations in markets that deflation will end. The Japanese currency touched 113.58 per euro, the weakest since August 4, 2011, and it was 0.2 percent lower at 85.80 per dollar.

USD/CAD
Canada’s dollar had the biggest intraday jump in almost two weeks against its U.S. counterpart amid investor optimism about the country’s economic prospects even with the risk that the nation’s largest trading partner may enter a recession. The Canadian currency fluctuated after U.S. lawmakers left for the Christmas holiday with only a week remaining to avoid automatic tax increases and spending reductions.

The measures, set to take effect January 1, might trigger an economic contraction. Even with the U.S. budget debate, figures released late last week show traders remain favorable on the longer-term prospects of the Canadian currency. The loonie gained to 99.17 cents per U.S. dollar.