FXstreet.com (Barcelona) - Lee Hardman, FX analyst at the Bank
of Tokyo Mitsubishi UFJ notes that the traditional safe haven
currencies of the USD and the Yen have weakened sharply, reflecting
investors initial relief that a last minute bi-partisan agreement
was reached by US politicians to avert the full extent of the
fiscal cliff.
He comments that the final bill which passed the House yesterday is
estimated to lead to fiscal tightening of around $250 bln, or 1.5%
of GDP dampening previously planned fiscal tightening of around
4.5% of GDP. . It permanently extends the Bush tax cuts for married
couples earning less than USD450k and USD400k for singles, and sets
the capital gains and dividend rates at 23.8% for those earning
above those income thresholds. It also sets the estate tax rate at
40% and exemption at USD5.0 million per person, and permanently
indexes the AMT exemption to inflation.
Hardman notes that the deal addresses mainly government revenue
measures with spending decisions largely left unresolved, although
the deal is likely to prove only a temporary fix to address fiscal
uncertainty in the US with the planned sequester government
spending cuts merely delayed for two months. He writes, "After the
initial relief that some form of agreement was reached, it is
likely that investors' focus will begin to centre upon whether US
politicians will be able to raise the debt ceiling in the next two
months to avert a technical default, and whether the delayed
sequester spending cuts will now come into force on the 1st March."
The fraught political negotiations again highlight that there is
still a high risk of a more unfavourable outcome emerging, with the
odds of a grand bargain being reached to put in place more credible
long-term fiscal consolidation having also decreased increasing the
likelihood of another US downgrade from the credit ratings agencies
ahead. Still, Hardman notes that the agreement should prove more
supportive for US growth in 2013 as the scale of planned fiscal
tightening has been dampened although uncertainty still surrounds
the implementation of the sequester spending cuts which were set to
total around USD110 billion in 2013.
He finishes by commenting that improving investor risk sentiment is
also being supported by further evidence overnight that the global
economy is continuing to recover with the HSBC manufacturing PMI
surveys for both South Korea and Taiwan returning to expansionary
territory above the 50-level in December.