Yellen nomination and FOMC minutes provide some distraction from fiscal drama
The financial press overnight announced that President Obama will today nominate Vice Chairman Yellen to replace Bernanke in the New Year. This announcement is in line with expectations that Yellen is the most likely candidate following Larry Summers withdrawal from consideration for the job. We expect that the immediate response by markets is likely to be muted with the US fiscal situation continuing to limit investors’ appetite for risk. US equity markets have started to react negatively to the increasing likelihood that the impasse in Washington is going to persist up to or even beyond the October 17 soft deadline for raising the debt ceiling. This implies near-term risks to the downside for the USD. We think USDJPY is particularly vulnerable in light of stretched short yen positioning and the yen’s structural tendency to perform well in periods of elevated risk aversion and market stress. In contrast, we think upside in EURUSD and Cable will be limited and we remain short those pairs, consistent with our bullish view on the USD looking beyond the immediate fiscal risks
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BNP Paribas