USD/JPY: Dollar little changed as risk aversion fades while concerns of US fiscal deficit rise

• US Dollar is trading little changed on the downside amid concerns of higher fiscal deficits 
• US rating may be under watch due to fiscal deterioration

USDJPY is now trading around 108.75, edged down by almost 0.15% after making a low of 108.03 on Friday. The US government fiscal balance is due to be reported later on Monday with no other important data due.

The USD tumbled by almost 1.99% in the last week amid “risk-aversion” move following “risk-off” trade in US equities primarily on concern of higher fiscal deficits, higher bond yields & higher borrowing costs for the economy in the days ahead.

USD is also under pressure as market is pricing now lower probability of 3 rate hikes by Fed in 2018 after stock market plunge. Elsewhere, Kuroda is all set for reappointment as the Bank of Japan (BOJ) governor  and that may also ensure gradual change of guidance policy by BOJ in the coming days (positive for Yen).

Market is concerned about US budget deal (additional $300 bln spending, mostly in defense,) corporate tax cut (tax deficit of $1.5 tln for next 10 years) & Trump’s infrastructure spending rhetoric to the tune of $1 tln over next decade which may create a huge US fiscal deficit.

The US Dollar recovered to some extent on sharp recovery of the equities in the Friday closing session on bargain hunting (short covering) as US stock market reached a correction territory (10% down from recent high & touched the 200-DMA).

Rating agencies are not happy over increasing US fiscal deficits

The US economic data were mixed with the Fed speakers of late rather hawkish. The USD is under pressure from US politics, debt limit drama and also fiscal slippages. Several rating agencies have expressed their concern for US rating pressure in the days ahead.

Moody’s warned that US credit rating likely to face downward pressure in the long term due to meaningful fiscal deterioration and widening Federal budget deficit despite certain strength in US economy amid rich resources endowment, high income levels, relatively supportive demographics and integral role in global capital markets.

Although, Moody’s will not downgrade US until it defaults or even if US government skips or delays payments of its non-debt obligations, US market crumbled on Friday after Trump signed a budget deal, which will eventually pave the way for $300 bln additional spending primarily in defense.

Trump will also go for $1 tln infra spending rhetoric this year in addition of $1.5 tln tax hole, thanks to US tax reform & cut in corporate tax rate. Thus higher government capex or increasing fiscal spending to stimulate the US economy and potentially lower government revenue may be a deadly cocktail of US fiscal deficit and thus rating agencies are quite concerned.