FX Daily Strategist: US

Markets have been riding a wave of optimism that a compromise on the debt ceiling is within reach, but so far a solution has not been accepted by both sides and discussions are likely to continue into next week. Yesterday House Republicans offered a short-term debt ceiling increase with no policy conditions attached. The initial White House reaction was positive, but the New York Times has reported overnight that the proposal has been rejected by President Obama. One drawback of the proposal is that does not address the issue of the government shutdown. However, in our view a healthy dose of caution is still warranted as likelihood of no deal until we get closer to the October 17 deadline remains high. Further delay would bring back more riskaverse sentiment, with the JPY likely benefiting, as we discuss in more detail in the latest edition of the Global FX Plus (Weekly). In our view, a cautious strategy positioning for temporary USDJPY downside is still warranted until political uncertainty is resolved. US data today is limited to the October Michigan consumer sentiment index which our US economists expect to remain unchanged from the September level at 77.5. Given the dominance of political headlines, the market’s responsiveness to the limited flow of economic data should remain quite low.