Double Blow for FX: Tax Hikes and Greek Concerns

Although no major U.S. economic reports were released this morning, there has been no shortage of volatility in the financial markets. President Obama is scheduled to speak at 10:30am ET and his new plan to cut the budget deficit by $3.6 trillion over the next decade will not go over well with investors. The President has been a big advocate for higher taxes and his announcement later this morning is expected to include higher taxes for wealthy individuals and corporations. The rich may be able to afford to pay more money to Uncle Sam but many corporations are already pinching pennies and talking about cutting costs and higher taxes could deal a further setback to corporate spending. The general fear is that Obama's tax plan could discourage rather than encourage hiring. At the same time, given the staunch Republican opposition to tax increases, investors are also skeptical about Obama's ability to get the plan through Congress. In all likelihood , this will be another uphill battle for the President lasting for the next 2 months. For the Federal Reserve, who has a monetary policy meeting this week, higher taxes means a greater need for more stimulus. Builder confidence was the only piece of U.S. data released this morning and according to the report, confidence declined in the month of September with the NAHB index falling from 15 to 14. This should not be much of a surprise considering that the housing market will not be able to recover until the economy recovers.

Meanwhile currencies and equities are trading lower across the board with the euro and the Australian dollar leading the pack. CDS spreads in Europe have shot higher as Greece flirts with the prospect of default. With the markets pricing in a 95 percent chance of a Greek default and economists polled by Reuters reporting a 65 percent chance, leaders across Europe are on high alert. The possibility of a Greek default has also resurrected concerns about a Euro break-up which is ridiculous but the fact that investors are even talking about a default shows just how worried they are about the situation in Europe and explains why the EUR/USD has taken such a sharp tumble this morning. Adding to the pain was Moody's plans to delay a rating decision for Italy - leaving the market guessing for another month.

Get use to the volatility because it is here to stay. We expect more heavy trading in currencies and equities in the front of the week with some profit taking on long dollar positions right before the FOMC announcement on Wednesday. Shorting dollars ahead of a big meeting that could result in a major policy change is a risky bet that many traders will not want to take and depending upon the outcome, we could see a big move in the U.S. dollar. The G20 will also be meeting at the end of the week and the possibility of coordinated action by the G20 could also lead to more erratic trading going into the weekend. In other words, grab your tin hats and be ready for some wild swings this week.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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