Fiscal Blues Aids Greenback Revival

A sense of political closure lasted mere hours last week before Obama’s victory parade disbanded in place of the next political minefield, the fiscal cliff. The US Dollar Index which measures its value against six major counterparts, recorded a weekly rise of 0.54 percent, led by a solid performance against the euro. Nevertheless, safe haven flows to the Japanese yen outpaced that of the greenback, with the USD/JPY pair finishing the week 1.16 percent in the red.

In his first address since re-election, President Barack Obama called on Congress Friday for compromise over automatic spending and tax cuts to kick in at the end of the year. At the centre of Obama’s plan is a Robin Hood style tax on wealthy Americans with annual earnings over $250,000 in an effort to “reduce the deficit by 4-trillion over the next decade." Specifically, Obama is calling for an extension of the bush-era tax cuts to all except those earning above the threshold. “We can’t just cut our way to prosperity, we have to combine spending cuts with revenue” Obama said.

While urging the need for comprise and noting he is not “wedded” to every detail of his plan. Just as well given Republican opposition to Obama’s deficit reduction plan, and if the 2011 debt ceiling negations are any indication, the stoush may be long, arduous and result in little more than a band-aid. Nevertheless, political will appears to be there, with House Speaking John Boehner telling his fellow Republicans – who have control of the House of Representatives – to fall into line, and build a consensus before automatic spending cuts and tax hikes kick in on January 1, and a recession ensues.

The transatlantic week ahead
In addition to the fiscal cliff, the US macro pulse will of course be closely watched with top-tier data such as retail sales, PPI, CPI on the agenda. Wednesday’s release of the FOMC minutes will attract the usual amount of attention, and watched closely in the context of stimulus and how Fed members judge the latest pick-up in domestic data.

Later in the week the health of US manufacturing will take the spotlight, with Philly Fed index on Thursday and Industrial and manufacturing production data points scheduled for release on Friday. It’s also a big week for Fed speeches with Fed’s Williams, Lacker, Fisher, Plosser, Dudley and Lockhart to speak at various events throughout the week. Fed Chairman Ben Bernanke will also speak in Atlanta on Thursday.

Across the Atlantic, the focus will be on Greece as Euro Group leaders meet this evening (local time) to discuss Greece’s progress, although it is unlikely the decision to unlock their next bailout installment will be made, given the Troika report has not been completed. At time of writing Greek parliament is preparing to vote on the 2013 budget, and it’s expected to see the bill pass by a narrow margin. On Wednesday, parliament voted in favour of budget cuts valuing 13.5 billion euros over the next two years, but today’s vote is a critical step before the next 31.5 billion euro bailout instalment is unlocked.

For Athens, securing their next tranche of bailout funds can’t come too soon, with 5 billion euros of maturing debt on Friday. Given the delays in the process of qualify it anticipated Greece will need to use stop gap measures as they wait for the next bailout instalment, which is now expected to be passed at the EU summit on November 19, or the a meeting of EU leaders on November 22. Across the channel, sterling punters will be watching data on inflation, employment and retail sales, with the Bank of England inflation report also traditionally a closely watched release.

Down but not out, AUD ekes out weekly gain
Despite succumbing to broad based risk aversion in the light of the US fiscal cliff concerns, the aussie’s performance over the past week was exceptional, managing to evade losses seen across its commodity counterparts the kiwi and CAD. The local unit shrugged off a 2.5 percent slide from the S&P500, generally considered of strong correlative value. The inflection point was set for the Aussie dollar after the Reserve Bank held rates steady, while stronger-than-expected local jobs and Chinese data assisted the local unit to counter the trend and finish the week a moderate 0.48 percent in the black.

We also saw the local unit resilient of the RBA’s Statement on Monetary Policy on Friday. Citing reduced mining investment and the Federal government’s efforts to return the budget to surplus, the RBA downgraded estimates to 3-percent in 2013, from previous estimates of 3.75 percent.

Still, the Aussie dollar continues to face headwinds with the same undertone of negativity from Europe and the United States. The never-ending conjecture surrounding Europe’s fortunes in conjunction with the current US fiscal focus may continue to negate some of the more optimistic themes underpinning latest Aussie’s ascent.

A light local week of economic feedback will see the focus shift offshore, with risk trends emanating for both sides of the Atlantic likely to govern sentiment, in turn, the appeal of the Australian dollar. Mid-tier data in frame this week includes home loan and NAB business confidence data on Wednesday, Westpac consumer confidence Tuesday, and consumer inflation expectations Thursday. At the time of writing the Australian dollar is buying 103.95 US cents.