These strategists aren't ruling out another credit-rating cut for U.S. debt.
Gee, the election has been exciting, hasn't it? That's part of the problem, say the currency strategists at Bank of America Merrill Lynch.
"The long-term fiscal outlook depends crucially on the outcome of the U.S. election this year," they wrote in a note to clients. New forecasts of the federal budget deficit by the Congressional Budget Office would change dramatically depending on the tax policies of the November winner, they say. They estimate that if the Bush tax cuts continue and budget sequestration does not take effect, the U.S. debt-to-GDP ratio would exceed that of France.
A rating cut is not the strategists' base case. Still, they say, "we cannot rule out the possibility that the rating agencies will weigh in on the debate over fiscal reform." Since a Republican president might extend the Bush tax cuts, and a Democratic president could face a deadlock over the budget, the debt limit, or both, Bank of America Merrill expects volatility in FX to pick up.
They also expect the uncertainty to lead the dollar to underperform the euro over time. "We see the November elections having a major impact on the US dollar; the upward trajectory of our EUR/USD forecasts from 1.30 at end-2012 to 1.35 at end-2013 is a reflection of this fiscal uncertainty."
The bottom line: be careful out there.
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