DailyFX

Bring on the Sequestration: US Dollar Surges as Austerity Hits Home

Christopher Vecchio

ASIA/EUROPE FOREX NEWS WRAP

What’s the best way to cure a spiraling budget deficit? - sweeping spending cuts and higher taxes, apparently. No, this isn’t some German-borne austerity package being jammed down the throats (and really, out of the pockets) of Greek or Italian consumers. Instead, it’s the brain child of Democrats and Republicans as part of the Budget Control Act of 2011, which pushed up the US debt ceiling in August 2011, shortly before the United States was stripped of its hallowed ‘AAA’ credit rating by Standard & Poor’s.

With no meaningful discussions occurring over the past several weeks, US lawmakers have bestowed the unfriendly gift of $85B in budget cuts today – all at once – as a result of failing to reach compromise to avoid the so-called ‘cliff.’ These are the first of $109B in budget cuts that will occur this year, mainly hitting defense spending, which already dropped by an annualized rate of -22.0% in the 4Q’12, as per the second release of the US GDP report yesterday.

While the moves in FX today by-and-large haven’t surprised me (I expected a flight to the safe havens; and the weak PMI data out of the Euro-zone and the United Kingdom has accelerated this move in the European currencies), I am a bit taken aback by price action in the Japanese Yen. Since mid-November, when it became clear that Shinzo Abe and his heavy dovish hand would dictate Bank of Japan policy going forward, the USDJPY has traded very closely to the 2s10s Treasury spread (the difference between the 10-year and 2-year note yields) as well as the S&P 500.

Thus, seeing the Yen struggle amid a pullback in equities and a clear reason for investors to seek safety – political issues weighing on the US economy amid new austerity, just as in Europe – is a surprise.

Taking a look at European credit, peripheral yields have compressed further today, despite a lackadaisical performance by the Euro. The Italian 2-year note yield has decreased to 1.826% (-7.6-bps) while the Spanish 2-year note yield has decreased to 2.425% (-2.5-bps). Likewise, the Italian 10-year note yield has decreased to 4.719% (-0.3-bps) while the Spanish 10-year note yield has decreased to 5.039% (-2.6-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 11:30 GMT

NZD: -0.08%

CAD: -0.14%

AUD: -0.19%

EUR:-0.21%

CHF:-0.37%

JPY:-0.38%

GBP:-0.90%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.39% (+0.35% past 5-days)

ECONOMIC CALENDAR

Bring_on_the_Sequestration_US_Dollar_Surges_as_Austerity_Hits_Home_body_Picture_7.png, Bring on the Sequestration: US Dollar Surges as Austerity Hits Home
Bring_on_the_Sequestration_US_Dollar_Surges_as_Austerity_Hits_Home_body_Picture_7.png, Bring on the Sequestration: US Dollar Surges as Austerity Hits Home

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

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