The Dysfunction in Washington

Many commentators and strategists are fascinated by politics. They over-evaluate decisions that will never make a pip of difference in the forex market. I steer clear of this sort of self-indulgent political pontificating because so often it morphs into a platform for whatever the strategists believes rather than what’s important to the market. At other times, the impacts will be so far off into the distance that any forex benefit will be so gradual that it’s negligible.

 

Other times, like now, even the most anti-political strategists have to give up on every other part of the market and focus on nothing but politics. The debt ceiling debate in Washington is a game-changer. Hopes for a long-term, comprehensive solution were dashed on Friday as it became abundantly clear that the Obama and the Republican-controlled House cannot work together.

 

Instead, the best hope now is to raise the debt ceiling high enough to get through the 2012 election. S&P warned that a short-term fix while piling on more debt and pushing problems down the road may lead to a downgrade.

 

When markets open on Monday, the dollar will fall as that threat inches toward reality. The US may avoid a downgrade for a year or two but it’s now inevitable. The enormous debt load combined with looming entitlements and zero appetite for tax hikes has cornered the United States. The economy is trapped in zero growth cycle that will last 10 years and Washington has neither the will nor the means to stop it.

 

The implications are obvious. The US dollar will fall and hard assets will soar. Gold going to $2000 in the near future is so obvious that it’s barely worth mentioning. The currencies that rise most against the USD will be those most tied to hard assets and least tied to US growth. The Asian, Antipodean, South American and Nordic currencies are set for a half-century of appreciation. This too was once set to be a slow, gradual climb but dysfunction like we’re seeing in Washington right now will speed up the process.

 

Our trade anticipating the fallout in Washington was initiated on Tuesday. We anticipated the problems that arose on Friday would arise earlier in the week. We entered a short USD/JPY trade at 79.21 (+69 pips) now and added to it at 78.45 (-6 pips). We will take profit on the first unit at 78.00. Our stops are at 79.00. Our trades are live if you follow on Twitter @FX_Button.

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