FX Daily: Some insights from the 2011 US debt ceiling crisis

Keeping an eye on Europe aside from US debt ceiling crisis and Fed hike bets.
Group Research, Philip Wee31 May 2023
    Photo credit: Unsplash Photo

    Today, the US House of Representatives needs a simple majority of 218 of 435 votes to pass the Fiscal Responsibility Act (FRA) before sending it to the Senate. Republicans hold 222 seats and the Democrats 213 seats. FRA is the compromise agreement between US President Joe Biden and House Speaker Kevin McCarthy to suspend the debt limit until 1 January 2025 (after the US Presidential Election in November 2024) and avert a US debt default on 5 June (X-date). After the House passes FRA, the bill will head to Democrat-held Senate for a vote on Friday or this weekend, in time for President Biden to sign it into law on X-date.

    The current drama is reminiscent of the 2011 debt ceiling crisis. After regaining control of the House at the 2010 mid-term elections, Republicans insisted that the White House reduce the deficit in exchange for an increase in the debt limit. The Republicans agreed to raise the debt limit two days before President Barack Obama signed the Budget Control Act on X-date. Despite averting a default, Standard and Poor’s axed America’s triple-A debt rating, which triggered a sell-off in equities and sent the DXY back to the year’s lows. Last week, Fitch placed US’s debt rating on a negative watch.

    However, USD bears learned an important lesson in 2011, i.e., EUR was the DXY’s largest component. The EU sovereign debt crisis followed the US debt ceiling crisis, hammered the single currency, and returned the DXY to the highs around the mid-term elections. Today, the EU Budget is under pressure from high inflation, aggressive rate hikes, and a drain in its long-term budget from the energy crisis and the war in Ukraine. Apart from needing to find new sources of revenues, such as taxes on corporations and the wealthy, the European Commission is urging member countries to reduce public spending to help fight inflation. Neither did it help that Germany, the EU’s largest economy, fell into recession.  Given the challenges, EU ministers are uncomfortable with Hungary assuming the EU presidency in the second half of 2024.

    That said, markets will pay attention to Friday’s US jobs data to validate the recent bets for a Fed hike at the FOMC meeting on 14 June. Although consensus expects nonfarm payrolls to fall to 195k jobs in May from 253k in April, markets are mindful that the data turned out stronger every month this year. However, the Fed still needs Congress to resolve the debt ceiling crisis to clear the path for a move.

    Quote of the day
    “Great leaders are almost great simplifiers, who can cut through an argument, debate and doubt, to offer a solution that everyone can understand.”
         Albert Einstein

    31 May in history
    Communists seized power in Hungary in 1947.

    Philip Wee

    Senior FX Strategist - G3 & Asia

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