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Forex pairs in this Article » (Barcelona) - The past week has seen risk sentiment start to sour, driven by increased 'fiscal cliff' concerns in the US and a deterioration of investor confidence in Europe writes Lee Hardman at the Bank of Tokyo Mitsubishi UFJ.

He notes that "The major US equity indices have fallen by around 6.0% from their recent peaks, while the yield spread between 10YR Spanish and German government bonds has re-widened back out towards 4.50% from a low of around 3.70% in mid-October."

He feels that it appears increasingly likely that trading conditions will become increasingly risk-adverse heading into year end with traditional safe haven currencies of the Yen and to a lesser extent USD, in favour if a timely resolution to the US fiscal cliff is not found and the Spanish Government continues its request for external support.

However, Hardman notes that there is building evidence that global growth appears to be stabilising which should help to provide support. Recent economic data in China has reinforced his view that the Chinese economy appears to have bottomed in Q3.

Overall he feels that the pick up in growth momentum dampens the need for the Chinese authorities to ease policy further. "The positive impact upon China-sensitive currencies such as the Australian dollar overnight has proved modest reflecting the fact the stronger data releases were flagged yesterday, and that the Australian dollar is already expensive likely anticipating an even strong recovery ahead."
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