On immediate and intermediate term bases the dollar continues to anchor primarily on monetary policy speculation and relative global central banker interventionalism.
The impacts of fiscal policy decisions (or the natural reversal in stabilization policies), however, are generally cumulative and build over longer durations.
With the unconditioned House passage of the Debt Ceiling increase and the Treasury’s monthly budget statement for January, we’ve receive two (somewhat contrasting) updates to secular drivers of the dollar over the last day.
On the margin, an unconstrained, albeit temporary, ceiling on sovereign debt issuance is dollar bearish while the ongoing improvement in federal deficit spending stands as an obvious positive.
Inclusive of January’s -$10.4B budget balance, fiscal 2014 remains on track to be the least profligate year since 2008. We show the Monthly and Fiscal YTD totals over the last 10 years in the table below.
Also, while federal spending/debt issuance has a seasonal component, spending in the first third of the year correlates strongly with full year deficit spending. The regression implied full year deficit total for fiscal 2014 is $581B – inline with the latest CBO estimate of $518B.
The deficit-to-GDP ratio is currently 3.4% on a trailing basis and if ~$500B is ballpark correct on 2014 deficit spending, we’d need to see nominal growth accelerate towards 5% to make a run at a 2-handle.
While we’d apply little weight to the incremental debt ceiling or budget data to our nearer term view on the direction for the $USD, we thought it worthwhile to provide a quick highlight of the current numbers in the context of the broader, multi-year Trend.
As it stands, the $USD remains in BEARISH FORMATION from a quantitative perspective and with the likelihood for incremental easing of policy with growth ebbing and inflation flowing, at the margin, we continue to think the risk is to the downside for the currency currently.
Christian B. Drake