US Senate Deal On, Taper Clearly Off

<p>The US debt can is kicked at ever shorter distances as markets cling to hopes that US Senate leaders has reached a deal to re-open […]</p>

The US debt can is kicked at ever shorter distances as markets cling to hopes that US Senate leaders has reached a deal to re-open the government until January 15 and raise the debt ceiling until February 7th with a $986 bn funding.

While a Senate deal is on, Fed tapering of asset purchases shall remain clearly off well into year-end. This explains the gradual pullback in the US currency following the day’s early rebound in the aftermath of the announcement of a deal. This is reinforced by the fact that January 15th also coincides with $21 billion in scheduled sequestration.

The risk of a US debt default remains minimal as the US govt prioritizes interest payments to holders of US treasuries. Failure to raise the borrowing limit would have forced the US to prioritize payments to Medicare/Medicaid payments on Oct 18, followed by unemployment insurance on Oct 21, social security on Oct 23 and tax refunds on Oct 24.

A White House announcement of a deal later this evening will likely trigger another short-term rally in risk assets alongside the US dollar, until equities revert to “earnings watch” into the ensuing 4 weeks and FX markets shift emphasis to higher yielding currencies, whose central banks show the most credible chance of a bottom in short-term rates and a maxed out easing policy.  So far, this continues to be the Aussie.

The Australian dollar remains the least affected currency against the US dollar as the news of a deal in Washington triggers a knee-jerk rally in the greenback against all major currencies. The RBA kept off its reference to the “high” currency in Monday’s release of the minutes from the Oct 1st RBA meeting, acknowledging the gradual improvement in economic data to remain on track. Chances of an RBA rate cut by year-end have been halved from a month ago to less than 20%.

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