Market Analysis

US Debt Ceiling Impasse May Attract Market Attention

Japan’s MUFG wrote last month that it suspected that “once the markets return from the summer break in August, the focus will quickly be on a potential crisis relating to the debt ceiling with the [US] Congressional Budget Office now predicting mid-October as the final deadline for raising the ceiling.” Well here we are near the end of August and the debt ceiling has still not been raised. “We’re going to get the debt ceiling passed,” Treasury Secretary Steven Mnuchin said on Monday while Republican Senate Majority Leader Mitch McConnell said there is “zero chance — no chance — we won’t raise the debt ceiling. No chance.” And yet it’s not yet been raised. And the CBO’s mid-October prediction of a deadline for raising the debt limit may be a little optimistic. “Come the end of September my magic, super Treasury powers will run out and we need to raise the debt limit,” Mnuchin said on Tuesday. MUFG’s July note pointed out the United States has been here before, both in July-August 2011 and in October 2013. On both occasions, the decision went to the wire.

On both occasions the US dollar fell on a trade weighted basis, falling by 3.3 percent between July 31 and August 8, 2011, and by some 3.5 per cent between September 18 and October 8, 2013. It may well be that Mnuchin and McConnell can get the debt ceiling moved higher before market hackles start to rise but it’s an issue that traders will anyway likely start to keep a closer eye on in coming weeks.

Written by Neal Kimberley, External Currency Analyst.