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Dollar to Find Support in US Budget Deadlock, Euro Debt Crisis

By , Currency Strategist
21 November 2011 05:38 GMT

Major Currencies vs. US Dollar (% change)

14 Nov 2011 – 18 Nov 2011

Dollar_to_Find_Support_in_US_Budget_Deadlock_Euro_Debt_Crisis_body_Picture_5.png, Dollar to Find Support in US Budget Deadlock, Euro Debt Crisis

Talking Points

  • EUR: Role of ECB in Debt Crisis Containment in Focus
  • GBP: Bank of England Minutes to Reinforce Case for QE
  • JPY: Intervention Threat Continues to Hang Over Yen
  • CAD, AUD, NZD: Comm Bloc Looks to Stocks for Cues

Most major currencies remain intimately correlated with the S&P 500 – a proxy for market-wide risk sentiment trends – suggesting big-picture trends continue to dominate price action. This keeps the spotlight on the Eurozone debt crisis but also brings in the US budget deadlock into the mix as the so-called Congressional “super-committee” fails to reach a deal on a deficit-reduction plan before a deadline that expires this week.

In Europe, the conversation is noticeably shifting to the role of the European Central Bank in containing the crisis, with calls for a large-scale QE program growing ever-louder in some parts of the currency bloc and across financial markets while meeting stiff resistance in Germany and at the central bank itself. Indeed, comments from newly-minted ECB President Mario Draghi last week bemoaning a potential loss of ECB credibility seemed to allude that he is partial to the German view of a narrow mandate focusing on inflation for the central bank.

With that in mind,harping on price stability while warning of mounting risks to growth may reflect a strategy to rationalize larger bond purchases without appearing to bail out governments by presenting QE as a bulwark against deflationary pressures. If such a narrative begins to emerge, it is likely to boost confidence in the short term and weigh on the safe-haven US Dollar against most of its counterparts (needless to say the Japanese Yen remains a special case as intervention fears linger). Otherwise, continued refusal to help tame soaring borrowing costs is likely to push the greenback higher.

Turning to the US, the probability that Congressional leaders will come up with a coherent plan to reduce the budget gap by over $1.2 trillion over 10 years before the looming November 23 deadline seems increasingly slim. If a deal does not emerge in time, automatic cuts will be triggered targeting the largest parts of the budget, with the Congressional Budget Office predicting cuts of 10 percent for defense, 7.2 percent for domestic programs, and 2 percent for Medicare.

On balance, such an outcome is unlikely to have significant impact on the near-term economic growth outlook considering the budget cuts do not enter into effect until 2013. This means that the markets’ sensitivity to the outcome is likely to be found in the large rating agencies’ actions in its aftermath. Standard & Poor’s now-famously cited political deadlock as a driving reason behind its decision to downgrade the world’s top economy earlier this year, which somewhat counter-intuitively proved to boost the US Dollar on safe-haven demand. If indecision produces another ratings action this time around, a similar response seems likely.

EURO

Dollar_to_Find_Support_in_US_Budget_Deadlock_Euro_Debt_Crisis_body_Picture_6.png, Dollar to Find Support in US Budget Deadlock, Euro Debt Crisis

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

23 NOV

8:30

German Manufacturing PMI (NOV A)

48.5

49.1

High

23 NOV

8:30

German Services PMI (NOV A)

50.0

50.6

Medium

23 NOV

9:00

Euro Zone Manufacturing PMI (NOV A)

46.5

47.1

Medium

23 NOV

9:00

Euro Zone Services PMI (NOV A)

46.0

46.4

Medium

23 NOV

9:00

Euro Zone Composite PMI (NOV A)

46.1

46.5

High

24 NOV

9:00

German IFO - Business Climate (NOV)

105.5

106.4

High

24 NOV

9:00

German IFO - Current Assessment (NOV)

115.0

116.7

Medium

24 NOV

9:00

German IFO - Expectations (NOV)

96

97

Medium

BRITISH POUND

Dollar_to_Find_Support_in_US_Budget_Deadlock_Euro_Debt_Crisis_body_Picture_7.png, Dollar to Find Support in US Budget Deadlock, Euro Debt Crisis

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

23 NOV

9:30

Bank of England Minutes

-

-

High

JAPANESE YEN

Dollar_to_Find_Support_in_US_Budget_Deadlock_Euro_Debt_Crisis_body_Picture_8.png, Dollar to Find Support in US Budget Deadlock, Euro Debt Crisis

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

24 NOV

23:30

National Consumer Price Index (YoY) (OCT)

-0.2%

0.0%

Medium

24 NOV

23:30

National CPI ex Fresh Food (YoY) (OCT)

-0.1%

0.2%

Medium

24 NOV

23:30

National CPI ex Food, Energy (YoY) (OCT)

-0.9%

-0.4%

Medium

CANADIAN DOLLAR

Dollar_to_Find_Support_in_US_Budget_Deadlock_Euro_Debt_Crisis_body_Picture_9.png, Dollar to Find Support in US Budget Deadlock, Euro Debt Crisis

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

22 NOV

13:30

Retail Sales (MoM) (SEP)

0.5%

0.5%

Medium

AUSTRALIAN DOLLAR

Dollar_to_Find_Support_in_US_Budget_Deadlock_Euro_Debt_Crisis_body_Picture_10.png, Dollar to Find Support in US Budget Deadlock, Euro Debt Crisis

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

22 NOV

23:00

Conference Board Leading Index (SEP)

-

-0.1%

Medium

NEW ZEALAND DOLLAR

Dollar_to_Find_Support_in_US_Budget_Deadlock_Euro_Debt_Crisis_body_Picture_11.png, Dollar to Find Support in US Budget Deadlock, Euro Debt Crisis

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

23 NOV

21:45

Trade Balance (NZ$) (OCT)

-450M

-751M

Medium

23 NOV

21:45

Trade Balance YTD (NZ$) (OCT)

490M

724M

Medium

23 NOV

21:45

Exports (NZ$) (OCT)

3.75B

3.44B

Medium

23 NOV

21:45

Imports (NZ$) (OCT)

4.23B

4.19B

Medium

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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21 November 2011 05:38 GMT