The U.S. debt ceiling deadline may be looming like dark clouds over the market horizon, but I’ve found a few reasons why this issue might not be such a big deal after all.
1. In 2011 the market was also dealing with:
Back when the debt ceiling issue popped up in 2011, risk appetite was really low since markets were also troubled by Greece’s potential default, Portugal’s and Japan‘s debt downgrades, the prospect of another global recession, plus ongoing riots in the U.K. Clearly, the global economy had more problems than a math book!
This time around though, market sentiment is much different as major economies like the euro zone, the U.K., and even Japan and China are all looking at optimistic economic growth prospects. With that, the debt ceiling issue might simply make a tiny dent in risk appetite.
2. The Fed is still stimulating the markets.
In the FOMC statement last week, the Fed decided to keep supporting the U.S. economy by refusing to taper its monthly asset purchases. Aside from helping sustain the progress in lending and spending, this could eventually stimulate the global economy as it would also ensure healthy demand and robust trade activity.
3. The Dollar Index is hinting at a repeat of history.
If you look at the USDX chart you’ll see that the dollar fell 200 pips from mid-July until early August when the debt ceiling deadline was due. It then encountered support at the 74.00 psychological area and even reached the 80.00 area by October.
This time around the USDX is consolidating at the 81.00 support on the daily chart. If history is to repeat itself, then the 200-pip fall from early September has already run its course. Does this mean that we’re about to see a dollar rally soon?
4. We’ve seen this before.
In 2011 the U.S. government alleviated the markets’ fears by raising the debt ceiling and promising to reduce future increases in government spending. Then, in 2013, they got over the fiscal cliff hurdle by passing a last-minute bill that includes a $600 billion tax revenue in a span of ten years. And then there’s the budget sequestration issue, which has gone relatively smoothly since early this year despite the onslaught of criticism.
As optimistic as the points above sound though, a bit of caution is still needed. For one thing, Treasury Secretary Jack Lew believes that the markets should take the debt ceiling issue more seriously. Major credit rating agencies like Moody’s are also watching like hawks and are ready to downgrade the U.S. credit ratings in case the government doesn’t pass a convincing solution.
In any case, remember to be careful in placing your USD-related trades over the next couple of days!