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Good US Budget News That Nobody's Talking About

Good US Budget News That Nobody's Talking About

Boris Schlossberg, Technical Strategist

Absent from the headlines is the fact that the US has reduced its budget deficit at an all-time record pace, making the real risk all about dysfunctional politics, not the nation’s fiscal position.

Markets remained in a state of suspended animation as progress on the US budget talks proves elusive, but the US dollar (USD) nonetheless saw a mild bid in today’s Asian and early-European trading sessions as some bargain hunting kicked in.

With little economic data on the docket today, currencies continued to trace out very narrow ranges, but the dollar gained some ground, especially against the Japanese yen (JPY), as USDJPY rebounded through the 97.00 figure.

At the close of yesterday’s North American session, USDJPY came under heavy selling as markets remained frustrated with the lack of progress on the US budget negotiations. The pair dipped to a low of 96.56, but bids ahead of the 96.50 level provided support, and the pair was pushing higher all night long as short covering helped boost USDJPY back above the 97.00 level.

See related: Debt Debacle Hits USD/JPY the Hardest

Although the threat of the first-ever US debt default is clearly a worry for the currency markets, one reason it has not (yet) created more risk-off sentiment is because the crisis is completely manufactured. Fiscally, the US is in a relatively strong position, having reduced its budget deficit at the fastest pace in history. Therefore, the issue with US sovereign debt is not credit risk, but political risk, and markets continue to believe that some sort of a deal will be struck.

Nevertheless, the partial shutdown of the government is clearly starting to take its toll, most notably in US consumer confidence. According to the Gallup daily tracker of US economic confidence, the index has plunged to -34, down 14 points from just two weeks ago to reach its lowest level since December 2011.

Although Gallup figures are mainly reflecting the anxiety over the current budget impasse, they could become a serious concern for the US economy if they begin to translate into slower spending, particularly ahead of the key Christmas shopping season.

In short, the longer the budget battle looms, the more difficult it will become to "restart" the US economic engine, and that could have more negative consequences for the US dollar.

For now, the currency markets will likely tread water as they await fresh developments out of Washington. With public polling now running at 70% against the GOP, the political pressure on the Republicans may be building, and that could provide an impetus for some sort of resolution before the end of this week.

In the meantime, USDJPY continues to hold support at the 96.50 level, and the pair could see a quick short-covering rally to 98.00 on any positive news out of Washington. On the other hand, if the stalemate drags through the weekend, the downside pressure could accelerate, causing USDJPY to tumble towards the 95.00 handle.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.