Super committee’s stalemate raises concerns over US debt

Earlier this week risk sentiment continued to worsen; eurozone debt issues remained dominant but with the US’s congressional super committee approaching a deadline set for mid week, focus at week start turned on the US’s share of outstanding debt.

Earlier this week Moody’s warned France over its funding costs and rating- Rudolf Muscat

The super committee was expected to pave the way for cutting federal spending by $1.2 trillion over 10 years. Composed of six Republicans and six Democrats who in the end were unable to overcome their political discrepancies and, faced by a stalemate, ended up confirming that they were unable to reach an agreement for fiscal consolidation. The risks posed to the US’s credit rating remain unclear but so far Fitch has said that the failure of the super committee could have a negative effect on the rating while Standard & Poor’s and Moody’s stated no immediate action.

Over the weekend sovereign debt claimed another political victim; this time round it was the Spanish ruling party. After Greece’s and Italy’s shift to new technocratic governments it was now Spain’s turn for a shift in government, this time however through general elections. Spain’s centre right Popular Party won the general elections with a good majority –186 out of the 350 seats, while the ruling Socialists saw their support shrink. Mariano Rajoy, the leader of the Popular Party, is expected to be sworn in as Prime Minister by December 20.

Earlier this week Moody’s warned France that if funding costs remain elevated, it could reflect negatively on the country’s credit rating. Separately a Spanish debt auction for three month and six month notes last Tuesday fetched an average yield of 5.11 per cent and 5.22 per cent respectively; which given the short term maturity comes out as a relatively high cost for Spain.

Up to the time of writing the EUR/USD traded in the range of 1.3430 – 1.3568. The euro, while weaker, has remained relatively resilient given the amount of events coming out of the eurozone. While we remain bearish on the EUR/USD we do not expect the currency pair to stage a clear downfall but to drop gradually. Investors are already sufficiently short on the euro and bouts of short covering have so far helped sustain these levels. Improving economic data coming out of the US also helped sentiment to a certain extent.

At week start the euro was up gaining 0.78 per cent to the major currencies, losing only against the Swiss franc. Most of the strongest gains for the euro came from against the riskier bets – namely the commodity bloc currencies (CAD, AUD, NZD). The elevated risk aversion left its mark on those currencies perceived as riskier bets – the AUD for example dropped below key levels against the USD. The AUD/USD dropped to six week lows, visibly breeching the parity levels, to mark lows of 0.98093 up to the time of writing. The AUD/USD had already tested parity towards the end of last week but had until then managed to find support at 0.9964.

From the United Kingdom data for Public Sector Net borrowing was better than previous and the expected levels, actual figures dropped to £3.396 billion compared to the previous £11.38 billion. The data in practice measures the amount of new debt held by the government; a budget deficit must be matched by an increase in net borrowing. Thus a drop in net borrowing bodes well for the economy.

The British pound was lower for the former part of the week, shedding 0.96 per cent to the USD and 1.14 per cent to the euro. The GBP however gained against the commodity bloc currencies. The GBP erased the gains made throughout the last month against the USD. GBP/USD reached lows of 1.5612 last Monday which level marked six week lows.

Against the single currency GBP strength ebbed out after the EUR/GBP reached 0.8485 earlier this month – while the currency pair was mostly trading sideways the euro managed to remain in the lead. Last Tuesday US Q3 GDP was revised lower to two per cent from the previous estimate of 2.5 per cent, personal consumption expenditure (PCE) for the same period remained steady at 2.3 per cent. Despite the revision lower in GDP the steady consumption levels and the weak inventory growth bode well for the next quarter.

Upcoming FX key events:
Today: German Q3 GDP, UK Q3 GDP.
Tomorrow: German Import Prices and French Consumer Confidence.

FX technical key points:
EUR/USD is bearish, target 1.3250, key reversal point 1.41.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bearish, target 1.5125, key reversal point 1.6170.
USD/CHF is neutral.
AUD/USD is bearish, target 0.9600, key reversal point 1.0745.
NZD/USD is bearish, target 0.7300, key reversal point 0.8239.

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Mr Muscat is a senior trader at RTFX Ltd.