The issue of fiscal cliff is set to linger.
IG Markets Singapore said:
The Singapore dollar ends the week stuck in a rut against the greenback despite a monumental week for the US.
While it has been a topsy-turvey week for risk assets the local currency has remained in a very tight range, sitting at $1.2255 this morning.
Any movement that has happened has seen the USD edge up slightly against Asian currencies.
Traders are still very worried about the fiscal cliff of tax hikes and spending cuts that will kick in next year, which could push the US economy back into recession.
This is likely to remain the hot topic for the rest of year and until a resolution can be reached. During this time, traders are happy to park sizeable amounts of cash in the safe haven of the greenback.
DBS Group Research meanwhile noted:
It was another bad day for equities. Dow Jones Industrial Average followed through Wednesday’s 312.95-point drop with another 121.41 point fall to 12811.32 in overnight markets. From its peak of 13661.87 on October 5, the Dow has fallen 6.23% so far. This was still less than the 9.77% witnessed during the May-June selloff triggered by political backlash against austerity in Eurozone.
This time around, the uncertainty was attributed more to uncertainties surrounding the US fiscal cliff. Why a risk that was talked about so much through the course of the year decided to manifest itself immediately after the US presidential election remains unexplained.
The deadline for divided US lawmakers to compromise on averting the cliff is the end of 2012. From market’s perspective, that’s a long period of uncertainty to stomach, considering that that we are only mid-way through the second week of November.
Then again, the VIX volatility index is now near the top end of its trading range established since mid-year. There were conciliatory gestures from both US President Barack Obama and Republican House Speaker John Boehner to find middle ground.
Standard & Poor’s removed US’s triple-A debt rating in August 2011 on politics standing in the way of policymaking. While S&P believes that there is a 15% chance of the US economy going off the cliff (essentially entering into a recession), the rating agency is also hopeful that US lawmakers will strike a compromise in time to avert one.
That said, US leaders have to provide guidance to a market fearful of uncertainties, that both sides are making progress to this end. They must now exhibit the same leadership they lectured were lacking during the Eurozone crisis.
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