US Party Politics a Speed-Bump Rather than a Barrier
The risk-on reaction to the Fed’s delay in tapering has been undercut by uncertainties over the US debt ceiling with the current federal budget set to expire at the end of this month. This emerging concern is best captured by the US sovereign 10Y CDS which has risen up 8bps over the past week. Though still at low levels, it is the first major move in this metric in atleast two months. Party politics will likely increase this uncertainty in the near term and could prevent a more risk-on tone from taking hold in the days ahead. The short-term budget resolution sent by the House Republicans to the Senate Democrats (on Friday) is likely to be watered down significantly (to dial down the “defunding Obama care” provisions) and sent back to the House for a second vote. Even if the stop-gap bill is finally passed, it is likely to be a eleventh-hour affair. However, we would fade this uncertainty and continue holding on to our long AUDJPY and short EURUSD recommendations. With US yields likely biased higher multi-month and the cyclical outlook for China improving near term, AUD should perform well and JPY should under perform. Moreover, if US fiscal policy remains only slightly tight as it is now (and unlikely to weigh significantly on growth), monetary policy will become more restrictive. The fiscal-monetary policy mix should hence remain supportive for the greenback.
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BNP Paribas