Longer-term US debt has to pay a premium for this uncertainty

Outlook:

Today has plenty of directly FX-relevant news to absorb—not only the ECB meeting and Draghi press conference, but eurozone flash consumer confidence and UK retail sales, al-ready out, plus US existing-home sales, weekly jobless claims, and the Kansas City and Chica-go Fed indices.

Also, Clinton testifies about Benghazi. As far as we can tell, Clinton did see a request for more security from Benghazi but staffers didn’t put it at the top of the priority list and the Republicans had already cut funding for State Dept security. The suggestion Clinton outright pulled security is a calumny and nearly a charge of murder.

The other political hot button is Trump refuting Jeb Bush’s assertion that George W. “kept us safe.” Pundits object, but 9/11 did occur on George W’s watch and he did start an unnecessary and unjustified war in Iraq, hardly keeping those soldiers safe. Jeb’s approval rating so far is in the single digits, possi-bly because voters really don’t like the prospect of George W’s advisors anywhere near the White House again. That the voters are flocking to the obviously unqualified but tremendously fun Trump indicates they are not too bright and easily manipulated, so maybe not. We complain that the campaign process is far too long—18 months compared to 78 days in Canada, for example—but this time it’s a barrel of monkeys.

The really important news over the next 8 days is the need for a dysfunctional House to raise the debt ceiling. TreasSec Lew says we will have used up all the extraordinary measures to fund the government by Nov 3. Various interim proposals for a temporary increase come with strings attached and will not be approved by the President. The House doesn’t even have a speaker yet and the 40 or so “Freedom” gang are clinging to the House’s one claim to fame—the Article One Constitutional power of the purse.

Even as we hurl insults at idiots who think it’s okay for the US to default, we need to remember these same idiots have a long history of wringing political concessions from presidents, including Lend-Lease to the UK during the war. We would bet a decent sum that if the US were to hold a referendum on re-quiring a balanced budget or at least a deficit at some percentage of GDP that is lower than 100%, like the eurozone’s 60%, the majority of citizens would vote for it, including bleeding heart Dems.

Of course US debt is to too high and of course we need to put something systemic in place to rein it in. But these guys are going about it the wrong way. They are giving fiscal conserva-tism a bad name when it should be a national top priority. In fact, the right Plub candidate prioritizing the deficit could get a lot of crossover Dem votes if he didn’t also shot himself in the foot with tax cuts for the rich at the same time. McCain looked like coming close last time out but then his staffer picked the Alaska nitwit to run as VP and it was all downhill from there.

It’s hard to say where US politics and another looming government shut-down come into the FX picture. The first shut-down, under Clinton because a Plub named Newt got his nose out of joint, had hardly any effect at all on the dollar. The last two had little observable effect, either. Short-term rates go up and that’s about it. But it’s ridiculous for the US to claim to be the leader of the free world and then have its housekeeping in shambles. It’s embarrassing, or should be. The guys who want to kick Putin out of Syr-ia and bomb the Middle East back to the Stone Age are the same guys who won’t pay the bill. Loss of respect for the US arising from George W’s foreign policy mismanagement is never going to be recov-ered at this rate.

But it’s more than some vague “reputation” thing. Somewhere in the back rooms of sovereign reserve managers and sovereign wealth funds are economists who downgrade the US on “ability and willingness to repay debt,” just as they do for Argentina or any other country. At some point, longer-term US debt has to pay a premium for this uncertainty.

Returning to the outlook for today, we just have to wait for the Draghi press conference and the market’s response to it. Every major country that engaged in QE—Japan, the US, the UK—has had to enlarge the program, so why should the eurozone be any different? Unless Mr. Draghi wants to boost confidence by claiming the program has already worked and no further initiatives seem likely. We imagine the confi-dence version has more attraction to Mr. Draghi than analysts now see. As noted above, a very large ma-jority expect enlargement in Dec or the first quarter. We are still a euro bull and it would take a dip to under 1.1250 to take that away.