The market reaction to headlines about potential compromise and Boehner backing off the debt ceiling are a good example of what will likely happen when a deal is eventually reached. Unless the deal comes like a bolt out of the blue (rare with so many leaks in Washington) or on the weekend, there will be a chance to chase the headlines.
The biggest USD gains were against CHF and JPY — the safe haven currencies. Expect that to continue. Since last Wednesday, when a shutdown became a real threat, USD/JPY is down 1.75%, or 1.60 pips. Even before that, worries about the October Congressional hurdles took a bite out of the pair.
A best case scenario is a deal that funds the government for at least six months (hopefully a year) and pushes back the debt ceiling at least as long. That’s the kind of deal that would put USD/JPY on a path to 100.
My main worry on the downside at the moment is that that Democrats refuse to negotiate and go for total victory.
