Article / 09 September 2011 at 8:58 GMT

Obama’s plan just what the USD doctor ordered?

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank
Obama gets aggressive on the stimulus front, trying to craft a new stimulus package that offers sufficient  Republican principles to gain passage. Importantly, no HIA-2 initiative was included. What does this mean for the USD?

Obama’s speech last night included more than the first reports indicating, as he called for a $450 billion plan rather than the $300 billion plan that was circulating prior to the speech . The plan will include payroll tax cuts (payroll taxes to be cut in half) and small business tax cuts (on payroll) in addition to traditional spending outlays. The plan is, of course, very front loaded to extract as much growth as quickly as possible ahead of the election next November. As for the damage the plan might inflict on the already yawning budget deficit, a vague suggestion was made that long-term spending cuts would be made to pay for the plan. Signals from Republicans in response to the speech were far more conciliatory than one might expect from recent behavior, though whether this was due to the plan’s conservative-leaning content or due to constituent criticism after the circus surrounding the budget ceiling showdown was unclear. 

The consensus read here is that the plan is relatively underwhelming, particularly as we have to wait to see in what form the plan or one like it will pass the ponderous sausage making US legislative process. I’m not sure I completely agree, though the biggest disappointment for those looking for a better fundamental reason to consider the USD is that the package lacks the key HIA-2 component. Still, there is enough of a reference to the mortgage issue (the potential for rewriting Fannie and Freddie mortgages) that something may happen on that front that could boost household spending in other areas of the economy. 

Let’s assume that by this point, Obama and his team have learned something during his presidency, like perhaps it is a good idea to poll Republican lawmakers to discover what measures would get them on board a new plan and the like. And Obama can rely heavily on game theory here – it is clear that voters are demanding action, doing nothing is not an option for either party, particularly given the pressures of the election cycle. Republicans will face enormous pressures from their constituencies to pass this new package because of its heavy reliance on tax cuts. And who knows, perhaps the final plan includes a small reduction on the spending side and an HIA-2 section thrown in by the Republicans for good measure…

I would expect obstructionism to not rear its head to anywhere near the same degree as we saw during the budget ceiling debate. The trouble for Obama may be that come election time, his “victory” here is in passing Republican leaning legislation – so Republicans will be happy to try to take credit should this package provide enough growth over the next three quarters to boost confidence and employment. And Obama will have meanwhile abandoned and disappointed his ideological base. 
As for the effect on the US economy, a new package is a short term fix that is similar in nature to all of the previous short term fixes, but it could boost the US economy at a time when economies elsewhere are turning distinctly south. Stay tuned.

Elsewhere, the Euro continues to suffer after Trichet’s downbeat assessment on the economic prospects for the EuroZone yesterday, falling further below that critical 200-day moving average in EURUSD. EURGBP, as we show below is now closing in on critical levels toward 0.8675, a break of which could also open up a new lower range. 

Very interesting support levels coming into view here in EURGBP toward 0.8675/50 area and the head and shoulders-like neckline area. 200-day MA just below 0.8700 was just crossed this morning as well.

EM currencies are taking it on the chin, particularly CEE currencies, which are off sharply against even the feeble Euro, such that the likes of USDPLN has risen some 8% during the last 7 trading days. The Aussie is curiously immune to this development, perhaps due to a focus on gold or still relatively resilient equity markets, but it’s hard to view the Aussie as any kind of strong performer when other barometers or risk are flashing red, so there may be some catch-up in order for AUDUSD and similar pairs if the S&P500 dips back below 1150 or so.

Be careful out there.

Economic Data Highlights
  • China Aug. CPI out at +6.2% YoY as expected and vs. +6.5% in Jul.
  • China Aug. PPI out at +7.3% YoY vs. +7.2% expected and 7.5% in Jul.
  • Japan Aug. Consumer Confidence out at 37 as expected
  • China Aug. Industrial Production rose 13.5% YoY vs. 13.7% expected and 14.0$ in Jul.
  • China Aug. Retail Sales rose 17.0% YoY as expected and vs. +17.2% in Jul.
  • Sweden Jul. Industrial Production rose +2.8% MoM and +8.2% yoY vs. +0.4%/+3.7% expected, respectively and vs. +7.0% YoY in Jun.
  • Sweden Jul. Industrial Orders out at +0.6% MoM and +0.4% YoY vs. +5.9% YoY in Jun.
  • Norway Aug. CPI out at -0.6% MoM and +1.3% YoY vs. -0.2%/+1.7% expected, respectively and vs. +1.6% YoY in Jul.
  • Norway Aug. Underlying CPI out at -0.6% MoM and +0.8% YoY vs. -0.2%/+1.2% expected, respectively and vs. +1.2% YoY in Jul.
  • UK Aug. PPI Input out at -1.9% MoM and +16.2% yoY vs. -1.5%/+16.8% expected, respectively and vs. +18.3% YoY in Jul.
  • UK Aug. PPI Output out at +0.1% MoM and +6.1% YoY vs. +0.1%/+5.9% expected, respectively and vs. +6.1% YoY in Jul.
Upcoming Economic Calendar Highlights (all times GMT)
  • Canada Aug. Unemployment Rate (1100)
  • Canada Aug. Net Change in Employment (1100)
  • Canada Aug. Housing Starts (1215)
  • US Fed’s Williams to speak (1545)


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