The ability of the current batch of leaders in the US and Europe to wait until the last minute before delivering crisis-averting policies is amazing. The European experience is that this trait results in increased market skepticism but on the face of it, the US debt deal isn’t bad.
A two-stage deal that could cut spending and increase the debt ceiling, both by USD 2.4trn is a little shy of what rating agencies suggested they need to do to avoid a downgrade, and spending cuts take 10-years to actually happen, but it’s a commitment to fiscal austerity. And – assuming of course that the deal is ratified – at least we should now be spared the chaos that could have been caused by failure to reach agreement.
This deal is risk-friendly. It would be churlish to suggest otherwise. USD/JPY and USD/CHF have bounced. USD/CAD, EUR/SEK and EUR/NOK have fallen. Re-iterating favourites, we like KRW in Asia, both SEK and NOK in Europe. Expect EM/FX to have a pretty generic rally, but we’d rather Asia and CEE to Latam. EUR/USD ‘should’ edge higher but remains in a range. I’m not sure it’s worth getting excited until/unless 1.45 has broken.
Away from the debt ceiling, the focus is back on economic data. A refresher says we got poor US GDP data, strong Swedish GDP, and soft EU CPI. This morning has Chinese PMI less soft than expected at 50.7, Australia’s PMI soft at 43.4 but Korea’s up to 51.3. Our eyes will be drawn to the UK PMI (exp 51, beware worse) and the US (expect a further dip from 55.3). There isn’t any doubt that the threat to risk appetite now, comes from the soft tone to data and conversely, if the US data are ‘OK’ the equity market in particular will rally through August.
With Korean inflation clearly a function of imported inflation, the odds that the KRW is allowed to rise on the back of inflows out of USD into the better performing Asia are rising. As a reminder we have a flattener in KRW FX vols, selling the 1Y vs one year. It can be taken with a directional bias especially downside in the front end. Vol term structures in Asia/FX have started to gently fade lower from extreme levels of steepness. Even in a risk off environment, they pay to insure against risk a rather neat combination.
Societe Generale
Research & Analytics