As this Der Spiegel article points out, the European debt crisis might be having a breather but is by no means over just yet. There might be some brief calm on the EUR front but it’s to the US debt ceiling that the world’s markets are now looking. The lack of progress is not a good sign so perhaps we should be preparing ourselves for some unlikely events.
The market sees a small debt deal with no default as the likely outcome which means that US debt will likely lose it’s AAA rating (probably by one notch) and will have more trouble selling its future debt, therefore driving US interest rates higher. How much bond prices fall will probably depend on the deal.
- Gold prices will almost certainly rise and the USD should fall, but will it fall across the board? I’d say probably not.
- The initial reaction would of course be to sell USD across the board but risk currencies like the commodity bloc of AUD, CAD and NZD would struggle to hold onto gains.
- Risk aversion would be high meaning the CHF and JPY would be most likely to gain (and as we saw from the earlier CFTC data, it looks like the market is already anticipating this).
- The GBP might underperform due to the heavy reliance of the City of London on financial markets
- Strangely enough, it could be the EUR that emerges as the big winner. The market is not long EUR and is overall bearish still imho. If there is no bad news on the EZ debt situation for the next few weeks and the US rating is cut, then we could see a big move into EUR, if only for a relatively short period of time, and that could drive EUR/USD back towards 1.55 and possibly higher.
Always plan for the unexpected. I’m sure there are lots of other possible scenarios?
