Credit Agricole

Asia overnight: It was a steady start to the week with most Asian bourses as well as S&P 500 futures trading higher at the time of writing. Despite the uncertain makeup of the German government following the general election, Euro Stoxx 50 futures were also trading higher. In signs of the market continuing to price in an energy crunch heading into the northern hemisphere winter, Brent crude prices hit their highest level in nearly three years. Commodity prices were stronger in general, and this led to outperformance of commodity currencies in G10 FX space with the AUD and NOK leading the way. The GBP and CHF were the modest underperformers during the Asian session.

USD: dancing on the debt ceiling It is crunch time in DC with the US government on the verge of announcing a partial shutdown after midnight on Friday and even a default in October, if US Congress does not approve further funding. Last week, the House of Representatives approved a bill that would fund the government through 3 December and further suspend the debt ceiling until the end of 2022. The bill could be put to a vote in the US Senate on Thursday, but the chances of it passing look slim given the threat from a GOP filibuster. In response, the Democrats may be forced to remove the divisive debt ceiling suspension provision to get enough GOP Senators to vote to extend the government funding into December. This will only delay the battle over the debt ceiling, however.

A debt ceiling suspension can be achieved in two ways: (1) by introducing a stand-alone bill on the Senate floor that can force the GOP to abstain rather than filibuster; or (2) by using the lengthy process of reconciliation that will require only a simple majority and thus no bi-partisan support in the Senate. Given that both the Democrats and the GOP want to avoid a default, a temporary extension of the government funding may be on the cards this week. This will allow fresh UST issuance just as Fed taper draws near and thus help drain the global excess USD liquidity in a boost to the currency. That said, the debt ceiling risks could continue to cast a shadow over the US markets and limit the USD gains in the near term.

ING

  • Sterling likely over-discounted the adverse risk environment at the start of the week, and managed to recover losses only after the Bank of England sent some hawkish signals as it announced policy yesterday. In particular, two points appeared to have a more hawkish than expected tone: a) the acknowledgment that some recent developments have strengthened the case for “moderate tightening”; b) the fact that one MPC member (Ramsden) joined Saunders in voting against maintaining the same asset purchase target. As discussed by our economist here, the UK economy is still set to face a number of headwinds this winter, and the MPC still appears divided around the threat that higher inflation is posing. In turn, we think that the current market pricing for a February 15bp rate hike seems too hawkish, and we continue to see no hikes before mid-2022.
  • This should, in our view, limit any further upside potential for GBP stemming from rate expectations. Incidentally, we expect GBP to become increasingly sensitive to data as any signs of weakness in the UK economy (and especially in the jobs market) could make investors scale back their views on a February hike. However, this should not be a story for the week ahead, as the UK calendar only includes some housing data and the final read of 2Q GDP. Given GBP’s recent increase in sensitivity to global risk aversion, we expect incoming news from China to drive most of the pound moves next week.