The US Debt Ceiling Could Cause More Trouble That Traders Account For

Talking Points:

• Following standoffs on the US debt ceiling in 2011 and 2013, we are once again heading for a Nov 3 deadline

• In previous iterations, the general market impact has cooled and now sees a market that seems blasé on the risk

• However, given the precarious state of risk trends and the narrow door for liquidity, it shouldn't be ignored

See the DailyFX Analysts' 4Q forecasts for the Dollar, Euro, Pound and Gold on the DailyFX Trading Guides page.

I've seen this episode before. The US government, unable to come to a budget agreement pushing the debate to the cliff where they face a technical default. According to the Treasury Secretary, that day is November 3. However, the market doesn't seem too concerned. It is unlikely that the US will actually default on its debts. We have seen two other political standoffs in the past (2011 and 2013), and both passed without a complete collapse of the financial system. That said, there was a risk impact. While we may have traced out this path before, the implications nowadays are much different than what they were previously. Now, we are facing a market that is far more aware of its risk exposure. Furthermore, concerns over liquidity are now commonplace. What happens if money managers primary liquidity source finds a gap? We discussed this underappreciated risk in today's Strategy Video.

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