Forex News – Washington deal: rejoice or get ready for the next fight?
October 17, 2013 9:20 am
News that a deal was done and dusted in Washington on the eve of the expiration of the debt ceiling was greeted with relief by investors, who pushed equities sharply higher. The US dollar however did not greet the news with the same enthusiasm, actually selling off after the news was digested.
So what lessons can be learned from the standoff experience? The first lesson is that Washington dysfunction reached a whole new level with the government shutdown and the threat of a default occurring at the same time. Markets mostly kept their cool, expecting a solution to the standoff at the eleventh hour and they were proved right.
It appears that the practice of the US electorate to split control of Congress so as to give the Democrats control of one chamber and Republicans control of the other, is not working out so well since Congress has not passed a budget since 2009. This has become a source of problems for the US economy, as politicians stumble from one crisis to the next with respect to public finances.
Whether the whole affair is repeated or not in early 2014 will probably depend on the polls and the public mood rather than politicians suddenly discovering the goodwill to negotiate and compromise on the budget. 2014 features the mid-term elections, where all 435 seats of the House of Representatives will be up for election, as well as a third of the Senate (33 seats).
If political strategists get a message from the polls that repeating this experience is likely to hurt their candidates in the mid-terms, they will be much more hesitant to push for a new crisis in an election year. This is particularly true for Tea Party Republican Representatives in the House, who ‘fired the first shot’ in this fight so to speak. Therefore it is all up to the voters and their interpretation of recent events.
In terms of the economic and market impact, although it is premature to make an estimate, according to S&P the shutdown will lop off something like 0.6% from 4th quarter annualized GDP growth, or 0.1% to 0.2% out of annual growth of approximately 1.5% for 2013. Although this is a one-off hit, the Federal Reserve could be now even more hesitant to taper in 2013 and will also be closely watching the budget negotiations which have a December deadline.
All in all, the whole affair is interpreted as a dollar negative with risk assets and risk currencies benefiting from the tapering delay and resulting extra liquidity.
News that a deal was done and dusted in Washington on the eve of the expiration of the debt ceiling was greeted with relief by investors, who pushed equities sharply higher. The US dollar however did not greet the news with the same enthusiasm, actually selling off after the news was digested.
So what lessons can be learned from the standoff experience? The first lesson is that Washington dysfunction reached a whole new level with the government shutdown and the threat of a default occurring at the same time. Markets mostly kept their cool, expecting a solution to the standoff at the eleventh hour and they were proved right.
It appears that the practice of the US electorate to split control of Congress so as to give the Democrats control of one chamber and Republicans control of the other, is not working out so well since Congress has not passed a budget since 2009. This has become a source of problems for the US economy, as politicians stumble from one crisis to the next with respect to public finances.
Whether the whole affair is repeated or not in early 2014 will probably depend on the polls and the public mood rather than politicians suddenly discovering the goodwill to negotiate and compromise on the budget. 2014 features the mid-term elections, where all 435 seats of the House of Representatives will be up for election, as well as a third of the Senate (33 seats).
If political strategists get a message from the polls that repeating this experience is likely to hurt their candidates in the mid-terms, they will be much more hesitant to push for a new crisis in an election year. This is particularly true for Tea Party Republican Representatives in the House, who ‘fired the first shot’ in this fight so to speak. Therefore it is all up to the voters and their interpretation of recent events.
In terms of the economic and market impact, although it is premature to make an estimate, according to S&P the shutdown will lop off something like 0.6% from 4th quarter annualized GDP growth, or 0.1% to 0.2% out of annual growth of approximately 1.5% for 2013. Although this is a one-off hit, the Federal Reserve could be now even more hesitant to taper in 2013 and will also be closely watching the budget negotiations which have a December deadline.
All in all, the whole affair is interpreted as a dollar negative with risk assets and risk currencies benefiting from the tapering delay and resulting extra liquidity.
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