Citi: "It Is Possible That We Will Get A Technical Default For A Few Days"
From Citi's head of FX strategy, Steven Englander
No coin + temporary debt ceiling extension + sequester = USD negative
There was a an out-of-left-field idea that you could mint such a coin deposit it at the Fed and have a trillion dollars to spend. It was based on a very strained reading of some old legislation. The Washington Post link shows just how strained the reading is
It really was a non-starter because it would have been risky from a legal viewpoint and financial markets would have priced in the risk that courts would have rejected it and the US would be close to default, not to mention the Fed looking rather Weimarian had they signed up for it.
The rejection of the trillion dollar coin should not put any pressure on financial markets or risk-correlated currencies on Monday
It may be viewed as political hardball by the White House, as there statement implies that they will not negotiate. WP quotes Press Secretary Carney “there are only two options to deal with the debt limit: Congress can pay its bills or they can fail to act and put the nation into default.” This is a new reading since in 2011, they were busily negotiating with Congress (which is how the sequesters and temporary debt ceiling increase came into being.)
So it is possible that we will get a technical default for a few days, but more likely that Congress will give in, vote the debt ceiling up temporarily, and let the automatic sequesters kick in.
Mounting risk of a technical default was USD positive in 2011 because it led to cutting of long-risk positions and the USD/Treasury market remained safe havens. However, it also occurred in an environemtn of slowing EM growth and intensifying euro zone soveregin risk pressure, so the USD support came from external forces as well. Given that investors are now somewhat long risk again, the position cutting is again likely to be USD positive, however, unattractive US assets were. As was the case in 2011, it is very unlikely that the Treasury will not pay its bills, although even a technical default could have very unforeseen consequences, given the multiple functions that Treasuries play in global financial markets.
The more likely scenario of sequester plus grudging debt ceiling rise is USD negative. It will put more pressure on the Fed to keep pumping liquidity into the US economy without giving any reassurance to investors that long-term fiscal issues are close to resolution.