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2 Oct 2013
Flash: Debt ceiling debate remains the more significant issue - Nomura
FXstreet.com (London) - Nomura strategists compare historical scenarios.
Key Quotes:
“Based on evidence from the US Treasury markets, particularly in T-Bill rates, we are only starting to price-in the risk of lawmakers being unable to increase the debt limit in time”.
“Market moves on Tuesday are the first sign that any likelihood of delayed payments or technical default is being priced into the market”.
“Other measures, including CDS spreads and FX volatility have shown slightincreases, indicating that there is some evidence, though it is not yet significant”.
“In 2011, most of the price action was in line with expectations, with the USD weaker vs. G10 and relatively flat in EM. Specifically JPY and CHF outperformed strongly, while the NZD also rallied. EUR price action was mixed”.
“In the current backdrop, we could be a similar market reaction as we get closer to October 17, though the absence of an acute euro-crisis could allow the EUR to strengthen further on this occasion. The one caveat to this view is that the recent EUR (and to some extent GBP) strength is driven by equity flows from the US. A US centric risk-off episode could be less positive for European currencies than the market would expect therefore”.
Key Quotes:
“Based on evidence from the US Treasury markets, particularly in T-Bill rates, we are only starting to price-in the risk of lawmakers being unable to increase the debt limit in time”.
“Market moves on Tuesday are the first sign that any likelihood of delayed payments or technical default is being priced into the market”.
“Other measures, including CDS spreads and FX volatility have shown slightincreases, indicating that there is some evidence, though it is not yet significant”.
“In 2011, most of the price action was in line with expectations, with the USD weaker vs. G10 and relatively flat in EM. Specifically JPY and CHF outperformed strongly, while the NZD also rallied. EUR price action was mixed”.
“In the current backdrop, we could be a similar market reaction as we get closer to October 17, though the absence of an acute euro-crisis could allow the EUR to strengthen further on this occasion. The one caveat to this view is that the recent EUR (and to some extent GBP) strength is driven by equity flows from the US. A US centric risk-off episode could be less positive for European currencies than the market would expect therefore”.