Calm Before The Storm
FX markets remain paralysed by uncertainty. Almost three weeks have passed since the Sept 18th FOMC decision and the timing of Fed tapering is as unclear now as it was then. How the fiscal stalemate in Washington will be resolved is still an open question too.
But it’s a benign type of uncertainty for now. FX vol (actual and implied) remains subdued. That’s not entirely surprising given the consensus expects a political solution to emerge before the US fiscal impasse spirals out of control. That would be enough to (1) avoid a technical default (2) remove a headwind to US economic growth (3) restart the flow of US economic data and (4) pave the way for the Fed to eventually slow the pace of asset purchases early next year. Those who sell out of risk assets now could miss a relief rally afterwards.
Read the full report: UBS