US Govt Shutdown & Beyond: Views On FX Focus of the day: "The direct effect of the government shutdown would be on US growth. Federal government consumption and investment would decline by 1.6% q/q saar for every week of shutdown as “non-essential” functions ceased. Our economists estimate that every week of a government shutdown would cost 0.1pp of GDP growth (saar). Our economists’ views on the growth implications of a slowdown are discussed here. Insofar as a government shutdown is temporary, the effect on growth will be modest and we expect any sell-off in market risk appetite to be small. We expect markets to trade mildly “risk-off” in the event of a US government shutdown. The USD should rally primarily versus US growth-linked currencies (eg, CAD and MXN)rather than broadly against high beta/high carry FX. We expect the USD to remain under pressure against the “safe-haven” currencies, including the JPY and CHF, whereas renewed political risks in the euro area (Italy, Portugal – see Snap elections most likely in Q1. The bigger market risk event remains a breach of the debt ceiling. We expect such an event to be more broadly risk negative. A higher risk of a US sovereign default should lead to a flight to liquidity and, ironically, a stronger USD, except against the most liquid/safest-haven ones: EUR, JPY, GBP and CHF (although EURCHF is already trading closer to the floor). High beta/high carry FX are likely to underperform."
Posted on: Tue, 01 Oct 2013 07:18:17 +0000
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