USD/CHF: US Economy Feeling The Pinch From Fiscal Cliff Uncertainty

The US dollar is presumed to weaken alongside the Swiss franc today as economic data continue to reveal a softening in US economic conditions amid heightened uncertainty over negotiations to avert the looming fiscal cliff. Yesterday, a report disclosed that American manufacturing contracted in November for the first time in three months as factories scaled back hiring and investment.

The Institute of Supply Management’s Manufacturing PMI fell from 51.7 points to 49.5 points last month, the lowest level since July 2009, confounding economists who projected a slight dip to a 51.5 grade. Details of the report suggested that worries over whether Washington will prevent the economy from falling off the fiscal cliff had many manufacturers on cautious mode.

Likewise, the slowing global economy and the effects of Superstorm Sandy, which shut down much of the Northeast for several days, are also partly to blame. Employment in the sector fell for the first time in three years, while a measure of inventories, a gauge of future demand, also dropped. The sub-index for new orders fell 3.9 points to 50.3, its weakest level since August, signifying that production levels are set to decline further in the coming months.

Manufacturing was a driver of US economic growth in the early part of the recovery but it has gradually weakened, leaving the task to other sectors such as housing to anchor the expansion. Tomorrow, another string of economic reports is set to highlight that the world’s largest economy is shifting into lower gear. The ISM is set to report that the services sector expanded at its slowest pace in three months in November while the Automatic Data Processing Inc. is believed to disclose that private sector hiring decelerated considerably in November.

Uncertainty from continued brinksmanship over a fiscal deal to avert the fiscal cliff is seen to be the culprit for the softening of economic conditions in the US. If the White House and Republican leaders fail to achieve a breakthrough, around $500 Billion in tax increases and $200 Billion in spending cuts are scheduled to take effect in early 2013.

In fact, according to the Congressional Budget Office, economic output would drop by 0.5 percentage points in 2013 while unemployment would likely rise to 9.1 percent by the end of the same year. Considering such worries over the US economy, a short position is recommended for the USD/CHF today.