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Welcome to my final Trading Tutors newsletter article for 2012.
With the deadline for the “Fiscal Cliff” fast approaching, I thought I’d finish the year with a look at the US Dollar and what might be in store for 2013.
First, a short explanation of what “fiscal cliff” actually means. The United States has accumulated a debt in excess of 16 Trillion Dollars. To put that number into perspective: if they were able to pay down 100 million dollars each day, it would take more than 438 years clear the debt. And that’s without any interest. 16 Trillion Dollars is approximately equal to the total value of ALL the publicly-listed companies in the US (think every single share of every single company including Apple, Microsoft, McDonald’s, Coca-Cola, IBM, and all the rest).
It is a sizeable debt, to say the least. On top of this, the US has run a budget deficit of more than 1 Trillion Dollars per year during Barack Obama’s first four years as President. That means they not only spent every dollar they received, but an additional 1 Trillion Dollars on top. Clearly this level of borrowing and spending is not sustainable. In August 2011, the US reached their self-imposed debt ceiling of 14.1 Trillion Dollars. You may remember the drama surrounding this event and the subsequent downgrading of the United States’ credit rating.
Their solution to the problem was to increase their debt ceiling to just under 16.4 Trillion Dollars, with one proviso - they had to do something about their budget deficits. To make sure this happened, a range of tax increases and spending cuts were legislated to commence at the end of 2012. Put simply, if no agreement was reached to bring the budget under control, these tax increases (or reversals of previous tax cuts) and some painful spending cuts would be automatically implemented. The idea was that these measures would be so objectionable that Democrats and Republicans would HAVE to reach an alternate, more palatable agreement. Most economists agree that if no action is taken, these spending cuts and tax increases will push the US over a fiscal cliff and into recession in 2013.
Well, here we are a year-and-a-half later, and as yet there is no such agreement (as at the time of writing: Wednesday, 12 December, 2012).
The fiscal cliff may or may not be averted. But either way, there is a second issue – the debt ceiling. The total US Debt as at 11 December, 2012 is 16.365 trillion dollars, dangerously close to their new, much higher debt ceiling. With or without a fiscal cliff agreement, that number is a problem.
These two events will give the markets plenty to talk (and worry) about in late-December and early-January. Economists are divided on what will actually happen and how the US economy and the US Dollar will be affected. I am not going to try and guess what will happen. Instead, I will focus on my charts.
Chart 1 below displays the US Dollar/Japanese Yen (FXUSJY in ProfitSource): Chart 1
click to enlarge
After a sustained bear market, the US Dollar has not been able to make a strong rally and the current upside movement appears to be running out of steam. On top of this, there are several old tops and upside resistance levels around the 85 level.
Regardless of the results of the debt ceiling and fiscal cliff negotiations, I wouldn’t be surprised to see the market interpret the outcomes as a negative for the US Dollar.
Chart 2 below displays the Euro/US Dollar: Chart 2
click to enlarge
Despite the ongoing dramas in Europe, the July low on the Euro has held and November appears to have given us a higher bottom and a new section to the upside. For more background, refer to “Euro Gets Set for a Second Section”, which I wrote at the time of the low.
Chart 3 below displays the Australian Dollar/US Dollar: Chart 3
click to enlarge
The Aussie Dollar has been stuck in a big picture wedge formation for the past 18-months. Despite a series of interest rate cuts and predictions of the end of the mining boom, the Aussie Dollar has remained relatively strong. If the outcome of the debt ceiling and/or fiscal cliff negotiations is perceived as negative for the US Dollar, the Aussie Dollar will go higher. And if it breaks 1.1080 (the post-float high made in July, 2011), there is little overhead resistance in the way.
2012 has certainly provided its share of volatility, trading opportunities, profits and frustrations – much like every other year!
I’d like to wish all Trading Tutors newsletter readers a Merry Christmas, a Happy New Year and an abundance of good health, happiness and trading profits in 2013 and beyond.
Be Prepared!
Mathew Barnes
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