Money in Motion

Why the Supercommittee Stalemate Affects More Than the Dollar

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Now that the deficit supercommittee has packed it in, interesting trades are surfacing.

You could almost see it coming last summer, but now it's official. The deficit supercommittee has failed, and Willie Williams, director of global macro institutional sales at Societe Generale, says it won't be just the U.S. economy feeling the pain. 

"We think the fiscal drag from just not having that stimulus is about 1.5%," he told me alluding to the $1.2 trillion in automatic spending cuts the stalemate triggers. "So if you're expecting 1% growth, and you get that 1.5% drag, the U.S. goes back into recession. We will now have fiscal drag coming out of the U.S. and Europe at a time when the global economy is struggling a bit to keep firing on all cylinders."

A weaker economy generally is a good thing for the dollar,  but as for other currencies, Williams says, "I think this is a negative for commodity currencies, anything that will have an impact on growth." He singles out the Canadian dollar  because of that country's extensive trading ties to the U.S., and the Australian dollar, which will feel the effect of a weaker U.S. economy along with some slowing down in China.

Selling the Australian dollar against the Japanese yen is a favorite trade of Williams' right now, but that's not your only option. "You have intervention risk" if the Bank of Japan decides to curb the yen's strength,  he says, "but commodity currencies against the dollar are also a reasonable trade."

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