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Demand for Safety Falls as Yellen Nomination Overshadows Budget Impasse

Demand for Safety Falls as Yellen Nomination Overshadows Budget Impasse

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Day nine of the US government shutdown and long-term solutions appear distant.

- US debt limit hit on October 17 (8 days).

- Announcement of Janet Yellen being nominated for Fed chair has “risk on.”

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(vs USD)








Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.30% (+0.39%prior 5-days)


After speeches late in the day by Democratic and Republican leaders it appeared that the US would remain in its state of fiscal gridlock with little signs of progress towards a broader, more enduring compromise. As the press conferences made clear, while both sides are willing to negotiate, the terms for negotiation coming from both sides of the aisle don’t appear likely to appease each side enough to suggest a deal is coming.

Now that the US government shutdown has merged into a debate on raising the debt ceiling, investors are ditching their recent complacency and showing signs of heightened sensitivity to the idea of the US defaulting on its debt. As noted last week, short-term US Treasuries were showing signs of fiscal stress; just yesterday, those fears seemingly exploded as the 1-month T-Bill yield surged to as high as 0.3397%, the highest rate since October 2008 amid the demise of Lehman Brothers.

Call it dumb luck or coincidence (I wouldn’t call it either), but the announcement that President Obama would nominate current Federal Reserve Vice Chairwoman Janet Yellen to become the next Fed Chairman has pushed the threat of US fiscal issues to the background. Indeed, Ms. Yellen has been viewed as the front-runner for several weeks now; and her ultra-dovish view has soothed fears that the Federal Reserve might withdraw stimulus in the near-term.

Risky assets are up overnight led by the higher yielding Australian and New Zealand Dollars. The nomination is overshadowing the larger and more important budgetary issues, but with the door at least cracked open slightly for a potential short-term resolution on the US debt issues, it is of little surprise that risk-correlated assets are responding as they are today. The permanence of the near-term swing in sentiment is unlikely to be sustained, however, with signs of progress on the US fiscal front, which is hardly a sure bet.

AUDUSD 5-minute Chart: October 9, 2013 Intraday

Demand_for_Safety_Falls_as_Yellen_Nomination_Overshadows_Budget_Impasse_body_Picture_1.png, Demand for Safety Falls as Yellen Nomination Overshadows Budget Impasse

Taking a look at European credit, weakness on the Iberian Peninsula may be weighing on the Euro on Wednesday, with both Portuguese and Spanish debt weaker on the session.The Portuguese 2-year note yield has increased to 4.429% (+6.1-bps) while the Spanish 2-year note yield has increased to 1.385% (+2.7-bps). Likewise, the Portuguese 10-year note yield has increased to 6.250% (+2.0-bps) while the Spanish 10-year note yield has increased to 4.310% (+2.2-bps); higher yields imply lower prices.

Read more: Japanese Yen Rallies, Aussie Suffers as US Fiscal Issues Remain Elevated


Demand_for_Safety_Falls_as_Yellen_Nomination_Overshadows_Budget_Impasse_body_x0000_i1028.png, Demand for Safety Falls as Yellen Nomination Overshadows Budget Impasse

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--- Written by Christopher Vecchio, Currency Analyst

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