The US dollar closed at its seven week high against the Euro on 25th November, witnessing a continued bout of strength that has seen the dollar gain by 6.50% over the last four weeks as the EMU struggled with surging sovereign debt costs, a series of downgrades which includes, apart from the usual PIIGS suspects, newbie’s like Hugary and Belgium. Further adding salt to the Euro’s wounds was a failed debt Auction for German debt- which effectively means that the investors are refusing to acknowledge the German bunds as the preferred measure of safe haven. However, with much of the negatives already being factored in and the stock markets entering into December, could we see a change in the scene?.
A latest WSJ post says that December is historically the second-best month of the year for stocks after July. The post further states that the US markets so far only have suffered limited damage from the market's other bogey--Washington's deficit-cutting impasse ( the first bogey being the Eurozone debt gridlock). The main risk which the US markets could rather run into is the much larger debt issue at home rather than across the Atlantic. US Treasury Bonds have rallied off late despite news that the so-called Debt Super Committee failed to agree upon fresh budget cuts ahead of its self-prescribed deadline. The lack of action from the group of legislators could certainly mean growing credit risk for the US Treasury and global credit rating agency could well throw a cat among the chickens by way of highlighting the US debt mania.
Data out earlier in the month from US Treasury showed the burden of federal borrowing on the shoulders of the American public reached $15,033,607,255,920.32.( stop counting it up-its 15 trillion). That was roughly equal to 99 percent of the size of the total US economy projected for 2011. That’s painstakingly high for an economy struggling to come out of a deep recession. Government debt has steadily climbed since August 2, when Congress broke a three-month deadlock and agreed to raise the country's official debt ceiling from the then-$14.3 trillion to $15.194 trillion. Debt covered by the ceiling - slightly less than total public debt - has grown to $14.989 trillion since then, with the government spending some $1.40 for every dollar it takes in revenues.
EURO/USD Monthly Chart
The implication of this for the Euro/USD pair could well mean that the USD might be nearing its short term top soon. The monthly chart for the pair indicates quite clearly that the EMA 100, currently placed at 1.3187 might be a critical supporting point for the pair. LAST MONTH AS WELL, A DROP UNDER EMA 100 WAS VERY SHORT LIVED AND THERE ARE NUMEROUS OCCASSIONS DURIING THE TORRID TIME AFTER LEHMAN BUST WHEN THIS THRESHOLD ACTED AS A VERY GOOD FLOOR FOR THE PAIR.
Game on then for the fx markets…the inherent weakness in the US economy has been masked to a larger extent by the worries over the Eurozone debt and the associated risk aversion in asset markets. Time is ripe for a turnaround it seems. The latest poster from the Economist magazine is also worth taking a note of. The lead story asks quite explicitly – Is this the end? This is indicative of the fact that sentiments for the Euro have been pushed down a deep hill. Good time to expect a turnaround when the popular opinion says the otherwise!