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FX Remains Complacent Towards US Fiscal Risks - Treasuries Disagree

By , Currency Analyst
04 October 2013 10:20 GMT

Talking Points:

- Italian PM Letta’s final vote sees support grow in Senate by two seats; governance situation nevertheless extraordinarily difficult.

- High yield FX and US stocks remains elevated despite US fiscal issues.

- US Treasuries may be signaling that debt ceiling worries will come to light next week.

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INTRADAY PERFORMANCE UPDATE: 09:30 GMT

MAJORS

AUD

CAD

CHF

EUR

GBP

JPY

NZD

(vs USD)

+0.53%

-0.04%

-0.16%

-0.07%

-0.46%

+0.14%

+0.12%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.04% (-0.58%prior 5-days)

ASIA/EUROPE FOREX NEWS WRAP

Higher yielding currencies and risk-correlated markets stabilized yesterday morning after US Speaker of the House John Boehner (R-OH) promised not to let the US default on its debt, essentially ensuring that the debt limit would be raised by October 17. The mere rhetoric of seeking compromise dismantled a ticking time bomb of growing negativity that had griped global markets in Asia and Europe on Thursday.

While FX and stocks may have bought the positivity – most notably the Australian and New Zealand Dollars recovering modestly against the safe haven complex – US debt markets have not. As noted earlier this week, the CDS curve for US government debt has inverted (1Y CDS > 5Y CDS) for the first time since July 2011 – a sign that this round of negotiations is more fierce than the fiscal cliff in December 2012.

With CDS spreads widening out suggesting greater fear, US Treasuries have also been signaling distress. The 1-month US T-Bill yield has spiked the past several days, from 0.0203% last Friday to as high as 0.1267% yesterday (at the time of writing, the yield was 0.1217%). This inversion of the yield curve on the short-end suggests funding stresses are rising as October 17 approaches, with thus far little evidence that markets are buying that a solution is around the corner.

FX_Remains_Complacent_Towards_US_Fiscal_Risks_-_Treasuries_Disagree_body_Picture_1.png, FX Remains Complacent Towards US Fiscal Risks - Treasuries Disagree

If short-term US yields continue to push higher as they have over the past week, otherwise complacent markets – commodities, equities, and FX – will be forced to take notice and there could me a not-so-minor correction as reality sets in. With both Democrats and Republicans remaining very-much entrenched in their ideologies, financial markets have an eerie similarity to late-July 2011. Read Senior Currency Strategist Jamie Saettele’s notes on “panic trading” in the USDJPY here.

USDJPY 5-minute Chart: October 4, 2013 Intraday

FX_Remains_Complacent_Towards_US_Fiscal_Risks_-_Treasuries_Disagree_body_x0000_i1028.png, FX Remains Complacent Towards US Fiscal Risks - Treasuries Disagree

Taking a look at European credit, the Italian 2-year note yield has decreased to 1.631% (-5.5-bps) while the Spanish 2-year note yield has decreased to 1.333% (-4.6-bps). Likewise, the Italian 10-year note yield has decreased to 4.298% (-6.7-bps) while the Spanish 10-year note yield has decreased to 4.201% (-2.8-bps); lower yields imply higher prices.

Read more: In the ECB’s Wake, Euro Looks Free of its Crisis-Mode Market Dynamic

ECONOMIC CALENDAR – UPCOMING NORTH AMERICAN SESSION

FX_Remains_Complacent_Towards_US_Fiscal_Risks_-_Treasuries_Disagree_body_x0000_i1029.png, FX Remains Complacent Towards US Fiscal Risks - Treasuries Disagree

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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04 October 2013 10:20 GMT