Risks for further JPY upside ahead of October 17
Both JPY and CHF are under some pressure this morning while the higher-beta currencies (AUD, SEK and NOK) are stabilising higher in response to reports that Senate Democrats plan a strategy to allow President Obama to increase the debt ceiling without votes. However, this morning’s price action is unlikely to last as such a measure would provide only a short-term solution and it is unclear whether this would pass in the Senate. The upside risks for JPY have increased, in our view. While it appears difficult to envisage the US government defaulting on its debt, it also appears increasingly likely that markets need to react to the negative risks to promote a break of the stalemate on Capitol Hill. Should risk aversion increase as the October 17 soft deadline for raising the debt ceiling approaches, both CHF and especially JPY stand to benefit by virtue of their large external surpluses. However, given FX positioning is extremely short JPY (compared with flat for CHF), JPY will be the best candidate for a hedge. Not only can the JPY gain from further repatriation, but the carry-trade activity seen over H1 (which prevented JPY strengthening on portfolio investment repatriation) can also unwind resulting in a breakdown in the recycling of Japan’s current account surplus. On Tuesday, US trade data will not be released due to the government shutdown.
Read the full report: FX Daily
BNP Paribas