Financial Markets Don’t Seem Worried About a US Default. Why?

Talking Points

Financial Markets Sanguine as US Budget Negotiations Continue to Drag On
New Zealand Dollar Outperforms on Risk Appetite Trends, Strong CPI Data
British Pound Unlikely to Find Lasting Support in UK Jobless Claims Report

Ongoing US budget negotiations remain in the spotlight for foreign exchange markets. The Japanese Yen declined and the New Zealand Dollar outperformed overnight as S&P 500 futures advanced on expectations that a deal will emerge without triggering an adverse “credit event” in the world’s largest economy. The Japanese unit came under pressure amid fading safe-haven demand while the Kiwi benefitted from standout RBNZ policy expectations – the most hawkish in the G10 – to capitalize on relatively well-supported risk appetite. Third-quarter New Zealand CPI data likewise helped, showing the year-on-year inflation rate rose to the highest since the first quarter of 2012.

On balance, investors’ sanguine mood seems logical. Intuitively, a US sovereign default scenario seems beyond the realm of possibility considering the US Dollar remains the go-to medium of exchange for the vast majority of international commerce while US Treasuries remain the benchmark “riskless” asset for global finance. At best, a US default would amount to hitting the reset button on everything we know about the worldwide economic and financial system since the demise of the gold standard in the late 1970s, and there seem to be entirely too many vested interests at play to allow for such an outcome. Indeed, the overall trend in US creditworthiness in the eyes of investors has actually shown improvement over recent years despite intermittent jitters.

September’s UK Jobless Claims report headlines the economic calendar in European hours. Expectations point to a 25,000 drop in September following a 32,600 drawdown in the prior month, putting applications for unemployment benefits at the lowest level since January 2009. While signs of improving labor-market conditions may offer a brief lift to the British Pound, the move is likely to be short-lived considering the limited implications of the data for near-term Bank of England monetary policy.

The trend in monthly claims figures has pointed to steady improvement since June 2011, meaning today’s result is unlikely to amount to more than another incremental move in a familiar direction. Meanwhile, overall UK economic data has increasingly underperformed relative to expectations since August (according to data compiled by Citigroup). On balance, that investors’ view of UK economic conditions is likely to continue to move closer toward the central bank’s less-optimistic view (as we discussed last week). With that in mind, we remain short GBPUSD.

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Asia Session:

GMT

CCY

EVENT

ACT

EXP

21:45

NZD

Consumer Price Index (QoQ) (3Q)

0.9%

0.8%

0.2%

21:45

NZD

Consumer Price Index (YoY) (3Q)

1.4%

1.2%

0.7%

23:30

AUD

Westpac Leading Index (MoM) (AUG)

-0.1%

–

0.4%

4:00

JPY

Tokyo Condominium Sales (YoY) (SEP)

77.3%

–

53.3%

Euro Session:

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CCY

EVENT

EXP/ACT

IMPACT