Forex Flash: Fiscal cliff looms larger - Risk on fans will need to be nimble – HSBC
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USD/JPY
FXstreet.com (Barcelona) - HSBC Strategists David Bloom and Daragh Maher believe that the upcoming Fiscal Cliff issue will suck all of the euphoria out of US politics in the next few weeks.
They write, "In many respects, the "risk on" mood we envisage in FX is largely an announcement effect, built on the relief that neither QE nor China will be challenged by the President. However, this euphoria will be challenged in the coming weeks by the looming fiscal cliff."
They believes that it may be possible for Democrats and Republicans to secure agreement on letting payroll tax cuts and the extended unemployment benefit programme expire. However, on the issue of scheduled increases in income taxes and spending cuts, they are not so sure as the two camps appear to be poles apart.
The result of this election makes it highly unlikely that the two major elements of the 'fiscal cliff' will be resolved during the "lame duck" session of Congress which lasts until January. They believe that markets will not enjoy such an lack of progress and the associated politicking, particularly if they cannot be confident the stalemate will be overcome in the new year.
They write, "We can quibble about whether such a fiscal threat would be good for the USD (safe haven bid) or bad (US-centric crisis), but the implications for risk appetite are less ambiguous. Such a mood swing from "risk on" to "risk off" would be especially challenging for the likes of AUD JPY, NZD-JPY and perhaps CAD-JPY."
The recent rally in USDJPY has reduced the intervention threat from Japan, allowing the Yen to act as the safe haven amid a deteriorating US fiscal backdrop. The pair note that commodity currencies retain their strong relationship to the S&P500's fortunes and would be vulnerable to US equity market weakness.
Ultimately they feel that the FX market reaction to the US Election is likely to be 'a game of two halves'. The first will be dominated by the "risk on" mood fostered by the Obama win, but the second half will see this mood tested by the looming US fiscal cliff.
They write, "In many respects, the "risk on" mood we envisage in FX is largely an announcement effect, built on the relief that neither QE nor China will be challenged by the President. However, this euphoria will be challenged in the coming weeks by the looming fiscal cliff."
They believes that it may be possible for Democrats and Republicans to secure agreement on letting payroll tax cuts and the extended unemployment benefit programme expire. However, on the issue of scheduled increases in income taxes and spending cuts, they are not so sure as the two camps appear to be poles apart.
The result of this election makes it highly unlikely that the two major elements of the 'fiscal cliff' will be resolved during the "lame duck" session of Congress which lasts until January. They believe that markets will not enjoy such an lack of progress and the associated politicking, particularly if they cannot be confident the stalemate will be overcome in the new year.
They write, "We can quibble about whether such a fiscal threat would be good for the USD (safe haven bid) or bad (US-centric crisis), but the implications for risk appetite are less ambiguous. Such a mood swing from "risk on" to "risk off" would be especially challenging for the likes of AUD JPY, NZD-JPY and perhaps CAD-JPY."
The recent rally in USDJPY has reduced the intervention threat from Japan, allowing the Yen to act as the safe haven amid a deteriorating US fiscal backdrop. The pair note that commodity currencies retain their strong relationship to the S&P500's fortunes and would be vulnerable to US equity market weakness.
Ultimately they feel that the FX market reaction to the US Election is likely to be 'a game of two halves'. The first will be dominated by the "risk on" mood fostered by the Obama win, but the second half will see this mood tested by the looming US fiscal cliff.
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