The bipartisan “Super Committee” or “Committee”

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The political will, or lack thereof, to find a deal in the US over the issue of a $1.2trn deficit reduction plan made sure that it was yet another negative start to the week. Equities smeared lower and the pound, for a few other reasons as well, was the biggest faller on the currency boards.

The bipartisan “Super Committee” or “Committee” as they now will forever be known by, released a statement last night outlining the fact that a decision by the 23rd was unlikely. We had known this was probable since the beginning of trading and risk was sold broadly throughout the session with AAA debt, the dollar and the yen the main beneficiaries. Things normally work in America when lawmakers put guns to their own heads but in this instance it looks to have failed miserably. With no agreement reached $1.2trn will be pulled from the defence budget and domestic departments at the beginning of 2013. Ratings agencies are yet to comment on these negotiations but any communication will have a whiff of downgrade about it.

The fall in sterling was also as a result of the words “deficit” and “reduction”. David Cameron admitted in a speech yesterday that the government’s austerity measures were behind schedule and that the remaining high levels of debt will drag on output. The repairs to balance sheets in households, businesses and, indeed, the government itself is still on-going and this is the problem. Chancellor George Osborne had said in March that the current structural deficit would be eliminated by 2014-15 however this looks likely to be extended to 2015-16 when the autumn statement is released on November 29th. Sterling rattled to a 6 week low against the dollar and a 3 week low versus the euro as a result and will remain wobbly in the short term.

With focus split between the Europe and the US at the moment it is crucial to hone in on what actually matters today. There has yet more anxiety surrounding European credit and in particular that of France over the past 24hrs. While French debt yields are not trading near the levels it hit earlier in the month they are still a full 1.5% higher on a 10yr term than that of Germany. Moody’s published a report yesterday that stated “any persistent increase in borrowing costs would amplify the French government’s challenges as growth slows”. I think it has become clear that France is not trading like a AAA rated piece of debt and therefore is prone to a downgrade. That would be a game-changer especially for the process of funding the EFSF; if France’s debt is not AAA then neither is the EFSF’s. Maybe that would be the fissure that prompt the Germans to allow the ECB to run the printing presses.

Structured data is thin on the ground today with UK public sector borrowing due at 09.30 and the second print of US GDP for Q3 at 13.30. We also have the minutes of the latest Federal Reserve meeting at 19.00 which we suspect will emphasise the challenges to the US growth position moving forward and will be viewed by the markets as laying the ground for further QE later on down the line.

Indicative Rates Sell Buy
GBPEUR 1.1562 1.1589
GBPUSD 1.5644 1.5669
EURUSD 1.3515 1.3538
GBPJPY 120.50 120.77
GBPAUD 1.5835 1.5861
GBPNZD 2.0852 2.0880
GBPCAD 1.6231 1.6261
NZDUSD 0.7492 0.7512
GBPZAR 12.96 13.01
USDZAR 8.2777 8.3147
GBPPLN 5.1422 5.1629
EURJPY 104.05 104.31

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