First, I'd like to focus on the technical indications of ebbing market momentum. The S&P 500 was able to finally break through to a new all time high, but it has shown a lot of hesitance since then. This shows up in the divergence between price action and the MACD(higher highs on the SPX and lower highs on the MACD). The case for weakness is made stronger by the bearish rising wedge, which shows waning upside price action.
Technicals don't always lead to follow through on their own though. The headlines are one of the big reasons that the reversal signs are looking serious. By itself the federal government shutdown isn't huge. It is estimated to shave a couple tenths of a percent off of GDP each quarter. The real paradigm shift is possible in about 2 weeks when we are estimated to hit the debt ceiling limit again. This could mark the first time the US has ever defaulted on it's debt. Although the Swiss Franc is the ultimate safe haven, the US dollar, and specifically Treasury Bonds are viewed as the lowest risk investment with a reasonable return. If we default on our debt, the mass exodus from the US dollar will be very abrupt, and cause a reallocation of capital across the globe. Generally, the US dollar and our equity markets are negatively correlated, especially during times of heightened risk. This almost certainly would not be the case under this scenario though. Equities would drop off because they are perceived as highest risk, but with falling confidence in our government and its ability to pay it's debt, this would not lead to the money staying here in US Treasury Bills. The Swiss Franc and Japanese Yen would be the most likely benefactors.
But wait, there's more!! The domino effect would be further amplified due to the looming 'taper' of FOMC purchases of $85 billion in assets a month. The first mention of this at the FOMC meeting coincides with the first of the three peaks you see on the S&P 500, which shows how much an impact just the thought of it had on equities. Depending on the severity of the federal government shut down, and possibly a continuation through a debt ceiling debate, this could slow down the economy enough to put the taper out a few more months. Which means the FOMC will keep printing $85 billion a month to further weaken a dollar that potentially fewer and fewer investors would be turning to for safety. There is still the wild card of who will be the next FOMC chairman as well. Obama has vaguely said it will be decided this fall, but that leaves the potential for further heightened volatility amid an already uneasy global marketplace.
Depending on how each one of these scenarios plays out, there is the potential for anywhere from a mildly bearish to extremely bearish US Dollar move. I'd like to say it seems like a slim chance that we could do something this ridiculous to our country which is just coming out of a recession, but the politicians appear quite content with playing games with the global economy. If the miraculously pull something together before too much damage is done to the economy, there could be still be a little bit of steam left in the US Dollar. The conditions are brewing up a perfect storm of financial instability that just could be big enough to throw the entire global economy off track, and I would recommend making plans for a very bumpy 4Q 2013.
Technicals don't always lead to follow through on their own though. The headlines are one of the big reasons that the reversal signs are looking serious. By itself the federal government shutdown isn't huge. It is estimated to shave a couple tenths of a percent off of GDP each quarter. The real paradigm shift is possible in about 2 weeks when we are estimated to hit the debt ceiling limit again. This could mark the first time the US has ever defaulted on it's debt. Although the Swiss Franc is the ultimate safe haven, the US dollar, and specifically Treasury Bonds are viewed as the lowest risk investment with a reasonable return. If we default on our debt, the mass exodus from the US dollar will be very abrupt, and cause a reallocation of capital across the globe. Generally, the US dollar and our equity markets are negatively correlated, especially during times of heightened risk. This almost certainly would not be the case under this scenario though. Equities would drop off because they are perceived as highest risk, but with falling confidence in our government and its ability to pay it's debt, this would not lead to the money staying here in US Treasury Bills. The Swiss Franc and Japanese Yen would be the most likely benefactors.
But wait, there's more!! The domino effect would be further amplified due to the looming 'taper' of FOMC purchases of $85 billion in assets a month. The first mention of this at the FOMC meeting coincides with the first of the three peaks you see on the S&P 500, which shows how much an impact just the thought of it had on equities. Depending on the severity of the federal government shut down, and possibly a continuation through a debt ceiling debate, this could slow down the economy enough to put the taper out a few more months. Which means the FOMC will keep printing $85 billion a month to further weaken a dollar that potentially fewer and fewer investors would be turning to for safety. There is still the wild card of who will be the next FOMC chairman as well. Obama has vaguely said it will be decided this fall, but that leaves the potential for further heightened volatility amid an already uneasy global marketplace.
Depending on how each one of these scenarios plays out, there is the potential for anywhere from a mildly bearish to extremely bearish US Dollar move. I'd like to say it seems like a slim chance that we could do something this ridiculous to our country which is just coming out of a recession, but the politicians appear quite content with playing games with the global economy. If the miraculously pull something together before too much damage is done to the economy, there could be still be a little bit of steam left in the US Dollar. The conditions are brewing up a perfect storm of financial instability that just could be big enough to throw the entire global economy off track, and I would recommend making plans for a very bumpy 4Q 2013.