Forex Flash: Overnight sequestration reconciliation has failed – UBS

Last ditch attempts to avert the onset of automatic spending cuts failed in the US Senate overnight. In particular, two bills (one Republican-sponsored, the other from the Democrats) failed to secure enough support and US equities responded by weakening into the close. According to Research Analyst Gareth Berry at UBS, “The stage is now set for the US dollar to benefit from a gradual increase in risk aversion over the coming weeks.”

Indeed, “our Asset Allocation team also recommended adopting a more defensive posture overnight. Our US economists expect a belated compromise deal will emerge over the weeks ahead, which should limit the economic fallout.” Nevertheless, they have already incorporated a 0.3% fiscal drag into their US growth forecast for this year, a forecast, which remains at 2.3%.

“Falling US yields mean the USD/JPY will now have to rely exclusively on BoJ developments to reach higher ground. Fortunately, BoJ Governor-nominee Kuroda is scheduled to appear at a parliamentary hearing on Monday, and we believe a barrage of dovish remarks should be enough to keep the USD/JPY aloft.” Berry adds.