USD performance might prove to be effectively a residual, though for the USD index JPY weakness tends to be USD negative due to the higher weight of the European currencies.

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ON BULLETS

• White House says fiscal cliff talks have regressed

• BoJ expands asset purchase program by Y10trn to Y101trn.

• NZ Q3 GDP weaker than expected at 0.2% q/q

USD The USD finally found some support against the EUR and GBP yesterday, and the 79 area in the USD index now looks like good short term support. The markets are still being dominated by yen cross activity, so the USD performance might prove to be effectively a residual, though for the USD index JPY weakness tends to be USD negative due to the higher weight of the European currencies.

The fiscal cliff negotiations appear to be stalling, and the risk negative implications of this may prove USD positive. Risks from over heavy yen positioning may now also be towards a short term USD recovery. Initial USD index resistance is around 79.60.

EUR The better IFO number yesterday helped support the EUR through the day, but end of year related buying and strength in the Scandis may also have been a factor. With nothing significant out of the Eurozone today (the ECB meeting is not a policy meeting) the EUR’s trend will probably be determined by sentiment towards the yen, much as it has for most of the last week.

With EUR/JPY very overbought and risk appetite fading with fiscal cliff optimism, the risks look to be on the downside, even if the move is only corrective. Short term support in EUR/JPY comes in near 110.

GBP UK retail sales will be the prime focus today. Our proprietary data suggests there was some weakness in the second half of November, so while there should be a recovery from the weak October numbers, the risks are that the recovery is less robust than the market is expecting. 1.63 is clearly a major short term resistance for GBP/USD, so weak numbers would suggest a selling opportunity at these levels.

The 0.8170 level is also a very big resistance in EUR/GBP, and looks unlikely to break without some significant news, and we doubt that the retail sales data will be weak enough to trigger such a break.

AUD The AUD has failed to benefit at all from the strength of equity markets in the last week, and with short rates now below 3% and real yields below Norway and even Japan (depending on measurement), it is hard to see it as the preferred high yielder. The 1.06 area appears to be a bridge too far at the moment, and even if it were to break above here on USD weakness, it is hard to make the case for the AUD as the preferred risk positive trade.

Spotlight – Surprisingly, everything’s up (except the yen) – It hasn’t been a particularly vintage year for foreign exchange, with declining volatility probably the main feature. The lack of action is illustrated by the fact that the USD trade-weighted index (TWI) is exactly unchanged y/y.

In fact, a surprising result for the year is that the only major currency that is down on the year is the yen – all the others are up (or in the case of the USD, unchanged). This is largely a result of the yen taking up a decent chunk of the trade weight in a lot of the currency pairs, but is nevertheless an odd result. The biggest gainer both this year and over the last two years in the NZD, but the AUD remains the most expensive currency based on our valuation models. In spite of all the Japanese politician talk about the “expensive” yen, it seems most of the work in weakening the yen has now already been done.

Read the full Lloyds Bank report here.