Strong cycle while US debt limit risk is postponed

Danske Research Team Danske Bank A/S

Global PMIs indicate strong global growth

In Event risk to the fore, published last Friday 1 September, we wrote event risks have returned to markets after being away for some time. However, at least for a few months, we do not have to worry about the US debt limit, after President Trump surprisingly struck a deal with the Democrats. The deal includes Harvey aid for Texas, extends government funding and suspends the debt limit until December. The deal caught us by surprise, as we thought the administration would be willing to fight harder for a longer lasting solution to the debt limit issue – however, the Republicans seem to be surprised as well. While the deal merely kicks the can down the road (see Flash Comment US: Debt limit fight postponed amid increased Fed uncertainty, 7 September), it means that in the very short term we only have to worry about the rising tensions with North Korea and the hurricanes hitting the US. As we still think the probability of an armed conflict with North Korea is low and hurricanes usually just have a short-lived impact on the economy, it is difficult to be very concerned at the moment, especially as global PMIs suggest the world economy is in very good shape. Based on the VIX, it also seems that investors are calm, as it remains very low historically. While the postponement of a more long-lasting solution to the US government budget and debt limit issues means we may not see a short-term relief rally in the equity markets, we still think equities are a buy on dips in the short term, as the global economy is strong.

Return of USD scarcity is postponed

In FX Edge: The return of USD scarcity, 29 August 2017, we highlighted that a solution to the debt ceiling issue would pave the way for an increase in the US Treasury cash balance in Q4 and a corresponding tightening of USD liquidity. However, due to the three-month suspension of the debt limit, the tightening of USD liquidity is likely postponed, possibly into 2018, as the stricter deadline is some months after December, as the Treasury can now “refill” some of the extraordinary measures it has exhausted in recent months. We still see value in positioning for tighter USD liquidity and a wider EURUSD CSS in 2018.

Download The Full Strategy

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.