Failure to Break Political Gridlock Raises Risk of US Default, Nearing Deadline of Oct. 17 - 14.10.2013

Risk appetite is fading as US lawmakers failed to agree on Saturday on extending the upper limit of the US debt above $16.7T. Christine Lagarde, head of IMF warned for a “massive disruption” to the global financial markets and real economy if the borrowing limit is not raised before the 17th of October.

On Friday, market participants saw White House meeting and talks over a short-term deal optimistically with global indices rising substantially however as talks failed during the weekend risk sentiment weighed. The S&P/ASX 200 declined by 0.44% while NIKKEI 225 is closed today on Health Sports Day. Moreover, the Senate and the House are still going to meet today on Columbus Day and US is on holiday, however hopes for resolution are weak amid Republicans have the majority of votes in the House and their conservatives are not willing to make any concessions to Barack Obama.

The greenback lost against its major counterparties on FX market open this week but in overall we would expect demand for the US dollar to increase as the risk averse deepens before Oct.17. However, failure to raise debt limit until Oct.17 would bring decisions to downgrade US credit outlook by major credit rating agencies and perhaps biggest creditors of USA would attempt to sell US assets and abandon US dollar reserves, setting a great selling pressure on the US dollar. Earlier today the US dollar index plunged slightly near support at 80.21 and is currently consolidating there.

The Japanese Yen strengthened mildly contra US dollar, with the USDJPY falling to support at 98.18 as investors are seeking a safer place for their money. At the same time despite falling Chinese exports by -0.3% while was expected to increase by 5.5%, decreasing Trade surplus to $15.21B for September from $28.50 the previous month, the Aussie opposed to US dollar dipped at 0.9432 at the open but then soared to 0.9472. The AUDUSD holds well in 0.9485/0.9432 consolidation zone and we do not expect any break out today.

Looking ahead, we do not expect much of volatility today due to low volume as Japan , USA and Canada are on bank holiday ahead of US earnings season beginning tomorrow. Eyes are again watching US lawmaker’s talks over US shut down and borrowing limit, we are concerned about failure to break through political deadlock and we are now expecting a last minute deal on Thursday. Moreover, as we start the 3rd week of US government shut down we are also now expecting a more than 0.3% negative effect on the annualized GDP.