FX Daily Strategist: Europe

Risk sentiment is trading on stronger footing following headlines that Senate leaders were ‘making progress’ towards a deal with the Senate Majority Leader Reid saying he expected an agreement to be reached this week. The USD is stronger against the major low yielders, especially the CHF and JPY, while the AUD and NZD are close to one-month highs. The bipartisan deal includes a rise in the debt ceiling until 7 February and an end to the Government shutdown. Progress is being made, but a setback, caused by the deal needing approaval in the House, can not be ruled out. While the probability of the US Treasury defaulting on a debt payment remains extremely low (less than 1%), it is possible that the impasse extends beyond 17 October forcing the Treasury to juggle cash flows. This should lead to markets starting to price in more significant systemic risk, which would boost JPY given short positioning and the likely repatriation by Japanese investors. Meanwhile, US data flow remains very limited although we will receive the October Empire State survey today. Our US economists expect a pullback to 4, reflecting the impact from the effects of the shutdown.