Traders ready to embrace riskier assets after cap agreement

Positive move: A trader works the floor at the New York Stock Exchange. The US dollar has benefitted from angst around the national debt limit and global markets are primed for a relief rally in the wake of a tentative deal. — AP

NEW YORK: Global markets are primed for a relief rally after US negotiators agreed to a tentative deal over the weekend to resolve a debt crisis that has battered risk sentiment in recent weeks.

The US dollar, which has benefitted from angst around the statutory borrowing limit, edged lower against risk-sensitive peers as trading got underway in Sydney.

Liquidity is set to be thin, with US and UK markets closed for national holidays, although treasury and S&P 500 Index futures will trade.

Investors had flocked to safety in recent weeks as the so-called X-date, the day on which the treasury expected it wouldn’t be able to meet all of its obligations, rapidly approached.

President Joe Biden and House Speaker Kevin McCarthy voiced confidence that their deal will pass Congress and reach the president’s desk for signature, averting a historic US default.

“Markets should breathe a sigh of relief,” said Chang Wei Liang, a strategist at DBS Group Holdings in Singapore.

“The deal appears well-balanced between reducing spending while not jeopardising growth and is likely to be a small positive for US treasuries.”

The Australian dollar nudged 0.2% higher to 65.28 US cents (RM3.01) in early trading, paring last week’s 2% drop.

The New Zealand dollar rose 0.3%, while the euro and pound were steady.

Somewhat ironically, the prospect of a US default has been a boon for the dollar, with the greenback advancing against all of its G-10 peers this month.

The currency’s outperformance, steamrolling even the traditionally safe-haven yen, which fell to six-month lows past 140 (RM4.59) per dollar last week, reflects the US’s unique position at the centre of the global financial system.

Even when the nation is flirting with default, investors have little choice but to flock to dollar-denominated assets like treasuries for protection.

An MLIV Pulse survey earlier this month showed US debt was second only to gold as the most popular asset to buy in the event of a default.

To be sure, treasury market investors have remained optimistic about the prospects for a debt deal, with swap traders now pricing in about a quarter-point rate hike over the next two Federal Reserve policy meetings, implying the central bank will be able to retain its focus on fighting inflation. The costs of weeks of political wrangling have already taken a toll.

The US Treasury has paid US$80mil (RM369mil) more to issue bills in the wake of earlier warnings about running out of cash. — Bloomberg

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