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The main feature in the foreign exchange market continues to be the yen's weakness. This weakness, based on expectations that the new Japanese government will succeed in driving the dollar to JPY90 with a combination of more aggressive monetary and fiscal policy ("Abenomics), is offering support to the other currencies. The yen sales are a combination of momentum and carry strategies.

There are two other forces in the market as well. First, the market is anticipating a further reduction in tail risks in Europe. Of course the large moves away from the abyss this year are clearly the doing of the ECB with its long-term repos and offer of (conditional) outright purchases.

However, the European Commission will reportedly do its part by granting several countries, including France and Spain, an extra year (and maybe two for Spain) to reach the 3% deficit target. An official announcement has not been made, but the signals from the EC and the Commissioner for Economic and Monetary Affairs Olli Rehn are unmistakable.

The other driver is the looming U.S. fiscal cliff and debt ceiling. Yesterday (Wednesday), the Treasury Department indicated that it will begin taking special measures to avoid violating the debt ceiling. After last week's failure in the House of Representatives, attention turns to the Senate. With the Democrats enjoying a slim majority, it is possible that they vote on a bill along the lines that Obama outlined.

There are a couple of other developments to note. In Italy, "Agenda Monti" is drawing some support from the UDC, some current cabinet members and some breakaway politicians. A poll suggests such support may translate into 15-20% of the vote in the late February election. Berlusconi at one and the same time wants to maintain that Italy is the second strongest economy in the euro area behind Germany and that Mario Monti has driven the economy into the ground.

Although it is hard to maintain both simultaneously, the unity of opposites during a campaign seems all too common. Perhaps the most important character in the Italian drama is neither Monti nor Berlusconi at the moment, but the center-left leader Bersani. He already made the most sensible response to Monti's manifesto, saying that he agrees with some, others a bit less so and other are open for discussion. Bersani has his own ambitions and seems reluctant to move over for Monti.

In the US, we are also monitoring the labor dispute at ports on both coasts. The eastern seaboard and gulf port dispute is the most pressing at the moment. A last ditch effort to meet with federal mediators was agreed upon, but time is running out. The current contract extension expires Saturday night. The ports handle a great deal of consumer goods and a labor dispute would disrupt the retail sector as well as distort trade and employment data. Only container traffic would be impacted (so autos and some perishable items are not included nor is military cargo). The National Retail Federation and various other industry associations are calling on Obama to invoke his authority to order a cooling off period.

Source: Abenomics And Other Drivers Of Holiday Markets