AUD/USD: Safety Bets Rise as Fiscal Cliff Talks Stall

The US dollar is seen to shine as an apparent stalemate on talks over averting a fiscal cliff is deemed to incite risk-off trades today. As the White House and Republican officials enter the final month of negotiations to avoid a year-end “fiscal cliff,” both sides struck an uncompromising tone yesterday, as warnings emerged that they will be unable to attain a deal to stop an automatic series of deep spending cuts and tax hikes that could tip the economy into recession.

After private meetings last week, leading figures on opposite sides doubled down on their positions in television interviews, blaming each other for the current stand-off to reflect talks that House Speaker John Boehner described as have gone nowhere. The central issue of how much to raise taxes on the wealthy remains under hot contention. Speaking at a television talk show, Treasury Secretary Timothy Geithner said that the Obama administration is open to entertain any Republican plans to avoid the fiscal cliff, but the Bush-era tax cuts for top incomes should be removed. He defends their position, saying that such tax cuts could $1 Trillion over 10 years. In contrast, Republican congressional leaders have flatly rejected the proposal, with Boehner saying he was “flabbergasted” by the plan.

Policymakers are aiming to secure a two-step deal by year-end. The first would lock in an initial round of spending cuts and potentially make changes to the tax code that would take effect in January. The second is seen to require officials to pursue an overhaul of the tax code and entitlement programs, with the White House setting August as its target date for the negotiations to end. With a little less than a month left, there seems to be a growing sense that no deal will be reached in time to avoid the fiscal cliff. Republican senator Lindsey Graham offered a pessimistic take, saying that going over the cliff is looking likely.

On economic updates from the US, the Institute for Supply Management is seen to report that the expansion in manufacturing conditions eased slightly in November. The ISM Manufacturing PMI is seen to have come in at 51.5 points last month, slightly lower than the 51.7-point reading registered in October. With business confidence still on shaky ground amid uncertainty over fiscal cliff negotiations, factory conditions are seen to have remained bleak.

Over to the Land Down Under, increased expectations for a rate cut by the Reserve Bank of Australia to help boost activity in the non-mining parts of the economy are seen to weigh on the Australian dollar. Hence, a short position is advised for the AUD/USD trades.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.