Think the European debt crisis is roiling the markets ? Wait until investors start focusing on the deficit SWAT team.
Until this morning, the euro was more or less holding up despite the turmoil in Europe, and that has flummoxed some investors. Mark McCormick, a strategist at Brown Brothers Harriman has a reason for the robustness: the deep divisions on the deficit supercommittee.
McCormick says markets are pricing in only a 7% probability that the supercommittee will reach a deal by its November 23 deadline. And if they don't, that means $1.2 trillion in discretionary spending cuts.
Why should currency investors care? Because that kind of tight fiscal policy, combined with sluggish economic growth, could push the Federal Reserve to be more accommodative. And "standard macro economic framework for currency analysis indicates restrictive fiscal policy, together with expansionary monetary, on average, tends to lead to domestic currency weakness," McCormick wrote in a note to clients. In essence, no deal means no dollar strength.Page 1 of 2 | Next Page