US debt ceiling – still important, but timeline extended. Very shortly after my Wednesday update, the Republican House leadership announced that the votes were there for an altered version of the spending bill that would lift the debt ceiling. This spooked markets and saw US treasuries rallying, as it shows strong Republican solidarity in the House, aggravating the risks that the debt ceiling issue goes down to the wire. (Again, the Democrat-controlled Senate and Biden will never pass the bill that the House Republican majority just passed) But later on the same day it also emerged that stronger than expected tax revenues over the last week as tax payments from this month roll in mean that crunch time has move back to July rather than the early June time frame. In short, while nothing is resolved and the issue could yet produce market instability, the immediacy of the problems has faded and we’ll have to see how the Biden administration proceeds from here after declaring no willingness to even debate the issue as the White House wants a lifting of the ceiling with no conditions. The latest Politico article on the subject suggests that the Democratic tactic will be to attack House members that supported the bill on holding the country hostage and for some of the bill’s controversial contents that would defund popular programs.
NOK gets another drubbing on Norges Bank FX purchase announcement for May. The Norwegian central bank seems to be calibrating its daily NOK sales poorly as its announcement of dropping the rate of sales (meant to offset incoming FX from oil and gas revenues) to NOK 1.4B per day from 1.5B. Something needs to change structurally in Norway if it wants a more rational FX policy in a time of inflation – yes, it can recalibrate NOK sales to get them at the right level relative to incoming oil and gas revenues (these ramped as high as NOK 4 billion per day during the high gas prices last year, but the reductions in purchase have apparently not caught up with the reality on the ground, judging from the market reaction. A more structural solution would be a deeper domestic bond market created by a Norwegian government that funds deficits with new debt. The Norges Bank should also run a slightly tighter ship (if this latest sprint higher holds, could they consider a larger hike next week?). EURNOK is working into nosebleed territory – could certainly go higher still, but if the right policy decision is hinted at, much less made, NOK could see an enormous course correction. Three-month and 6-month EURNOK volatility suggest few risks of such volatility lie over the horizon. Medium to longer term NOK upside via options is a strategy worth consideration.
Table: FX Board of G10 and CNH trend evolution and strength.
The JPY jolted lower on the dovish BoJ today, but the move needs support from global bond yields rising if something bigger is to build in the weak JPY trend. Yields are currently rangebound (and lower today in Europe on Germany’s soft -0.1% work-day-adjusted QoQ GDP print vs. +0.3% expected). The EUR is struggling a bit today, but would need a sharper sell-off to indicate a challenge of the uptrend, while the USD is firm against the weakling commodity dollars and hopeless NOK.