A standoff over the US debt ceiling could upset equities and the Aussie – Westpac

Republicans are still the favorites to win control of the House, which would end up with a divided Congress. Judging by the 2011 episode, a standoff over the US debt ceiling could upset equities and the Australian Dollar, Sean Callow, Senior Currency Strategist at Westpac, reports.

US Midterm Elections: Implications for AUD

“The most obvious parallel is with 2011 when President Obama faced an emboldened Republican House majority. While a default was narrowly avoided, the multi-month standoff prompted S&P to cut their US credit rating from AAA to AA+ on 5 August 2011. Bloomberg economists estimate that a similar showdown in 2023 could cut US GDP growth by almost 1%.” 

“The dramatic 2011 standoff reverberated around the world. A flight to safety sparked intervention by the Bank of Japan and Swiss National Bank to stem the surge in their currencies. The AUD was extremely high in July 2011, around 1.10, bolstered by the gap between the RBA cash rate at 4.75% versus a Fed funds rate still at its post-financial crisis low of 0.25%.” 

“But the turmoil generated by the US debt ceiling showdown spilled over to the Aussie, which tumbled 10 cents from above 1.10 in late July to around parity in mid-August. Of course, there are always many differences in the macro environment, but the Aussie remains sensitive to bouts of risk aversion from whatever source.”