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USD CAD - FUNDAMENTAL ANALYSIS The Canadian dollar (CAD) is poised for potential gains, especially if the Bank of Canada's impending policy rate decisions, likely influenced by robust economic indicators, result in a surprise rate hike and policy reconvergence. Bank of Canada's Policy Rate Steady But Rate Hike on Horizon According to Brian Daingerfield however, Head of G10 FX Strategy at Natwest, the Bank of Canada (BoC) is likely to hold its policy rate steady at 4.50% at their next meeting on June 7th. "We expect no change in the Bank of Canada (BoC) policy rate at the June 7th meeting. Since pausing at the January meeting, the economic outlook has remained resilient and services CPI has shown signs of reaccelerating," he states. Daingerfield adds that there is a strong case for a rate hike at one of the BoC's next two meetings, most likely in July. According to their research, the recent economic data indicates the need for additional monetary tightening. "In our view, the data are now showing evidence that additional tightening is needed. On the labour side, April’s job data showed a market still in excess demand with an unemployment rate of 5.0% (unchanged since December) and hourly wage growth of 5.2% y/y," he says. Additionally, the analyst points out that first quarter GDP came in quite strong, exceeding both market expectations and BoC's projection. Canadian CPI data for April revealed higher-than-expected figures, contributing to the case for tightening. Daingerfield elaborates, "On inflation, Canada CPI came in stronger-than-expected on both the monthly and annual headline figures for April. While the bank’s key measures of core inflation have been relatively stable on short-term aggregates, the services category has sharply accelerated on a 3-month annualized basis." However, the analyst notes that BoC Governor Macklem seemed to take a more relaxed view of the data, hinting that the Bank may not be ready to abandon its rate pause just yet. Implications for the Canadian Dollar The recent strength of the USD has had a significant impact on the Canadian dollar (CAD), which Daingerfield views as a high-beta USD currency, closely tracking US data and the Fed. "In recent weeks and months, the USD tide has continued to act as a driving force for the Canadian dollar, and as the USD has found its footing the CAD has rallied on crosses in lockstep with the USD," he observes. However, the analsyt suggests that strong domestic data, particularly April's CPI and first-quarter GDP, introduce risks to this trend. Return to Tightening Cycle Likely to Boost CAD Daingerfield believes that a return to the tightening cycle by the BoC could be beneficial for the CAD, especially given its lagging position relative to its G10 peers. "A rate hike would return the BoC to the tightening pack given that it was the first major central bank to announce a pause to its rate hiking cycle on January 25th," he says. Daingerfield also speculates that a hawkish statement in June or a surprise rate hike could act as tailwinds supporting the CAD's performance against the USD and other currencies.

GOLD FUNDAMENTAL ANALYSIS Amid the looming US debt deadline, recent developments have triggered a turn towards gold as an instrument of risk hedge. Investors are closely examining the potential impact of a US debt ceiling agreement and its implications for federal spending. "Fitch moved the US sovereign rating on a watch negative radar as debt deadline looms. Investors are also assessing the possible impact of a US debt ceiling deal and how it could cut federal spending" says Ehsan Khoman, Head of Commodities, ESG and Emerging Markets Research at MUFG. Gold is being eyed as a promising refuge in the light of certain economic conditions. Khoman adds, "This had pushed investors towards gold, as a hedge against risk." The complexity of the current financial environment has particularly strengthened gold's attractiveness. Gold Outperforming in a Challenging Economic Environment While the Federal Reserve persists in tightening despite the rise in producer prices, money supply, and bank deposits, gold has emerged as a shining performer. Khoman mentions, "The unprecedented combination of the Fed still tightening in H1 2023 despite elevated producer prices, money supply and bank deposits, favour gold." The precious metal has outdone other constituents of the Bloomberg Commodity index on an annualised basis. According to the analyst, gold's beneficial position is likely to persist as the world navigates beyond the Federal Reserve's hawkishness. "Gold’s value proposition remains constructive as we are moving past Fed hawkishness since the US is seemingly slowing without derailing growth elsewhere," says Khoman. This economic slowdown could spur increased investment demand for gold, which has been relatively dormant in recent years. Emerging Market Central Banks Keep the Demand for Gold High Central banks in emerging markets (EM) are actively acquiring gold, a trend that has kept the demand for the precious metal robust. This purchasing pace is driven by geopolitical risks and de-dollarisation trends. "EM central banks continue to purchase gold at pace – a trend that we expect to continue to dominate gold demand on the back of elevated geopolitical risks and de-dollarisation trends," Khoman explains. Amid these forces, the trajectory for gold prices is set to rise, albeit at a potentially slower pace than seen previously. The analyst further states, "Overall, this suggests gold is poised to move higher, although it may be more of a slow grind than continued spike." MUFG's gold price models project an average of USD1,980 per ounce this year, with a tendency for the price to exceed this prediction. Khoman suggests, "Our gold price models signal an average of USD1,980/oz this year, with risks skewed to the upside." The gold analyst concludes that in a climate of increasing anxiety and looming recession risks, the potential downside for gold under a soft landing or further hawkish moves from the Fed is significantly less than the upside in the event of a growth shock pushing the US economy into recession. However, it might be challenging for gold to cross the USD2,100 per ounce threshold without the Fed resorting to rate cuts in response to a recession that necessitates pivoting towards growth support.

GOLD FUNDAMENTAL ANALYSIS Amid the looming US debt deadline, recent developments have triggered a turn towards gold as an instrument of risk hedge. Investors are closely examining the potential impact of a US debt ceiling agreement and its implications for federal spending. "Fitch moved the US sovereign rating on a watch negative radar as debt deadline looms. Investors are also assessing the possible impact of a US debt ceiling deal and how it could cut federal spending" says Ehsan Khoman, Head of Commodities, ESG and Emerging Markets Research at MUFG. Gold is being eyed as a promising refuge in the light of certain economic conditions. Khoman adds, "This had pushed investors towards gold, as a hedge against risk." The complexity of the current financial environment has particularly strengthened gold's attractiveness. Gold Outperforming in a Challenging Economic Environment While the Federal Reserve persists in tightening despite the rise in producer prices, money supply, and bank deposits, gold has emerged as a shining performer. Khoman mentions, "The unprecedented combination of the Fed still tightening in H1 2023 despite elevated producer prices, money supply and bank deposits, favour gold." The precious metal has outdone other constituents of the Bloomberg Commodity index on an annualised basis. According to the analyst, gold's beneficial position is likely to persist as the world navigates beyond the Federal Reserve's hawkishness. "Gold’s value proposition remains constructive as we are moving past Fed hawkishness since the US is seemingly slowing without derailing growth elsewhere," says Khoman. This economic slowdown could spur increased investment demand for gold, which has been relatively dormant in recent years. Emerging Market Central Banks Keep the Demand for Gold High Central banks in emerging markets (EM) are actively acquiring gold, a trend that has kept the demand for the precious metal robust. This purchasing pace is driven by geopolitical risks and de-dollarisation trends. "EM central banks continue to purchase gold at pace – a trend that we expect to continue to dominate gold demand on the back of elevated geopolitical risks and de-dollarisation trends," Khoman explains. Amid these forces, the trajectory for gold prices is set to rise, albeit at a potentially slower pace than seen previously. The analyst further states, "Overall, this suggests gold is poised to move higher, although it may be more of a slow grind than continued spike." MUFG's gold price models project an average of USD1,980 per ounce this year, with a tendency for the price to exceed this prediction. Khoman suggests, "Our gold price models signal an average of USD1,980/oz this year, with risks skewed to the upside." The gold analyst concludes that in a climate of increasing anxiety and looming recession risks, the potential downside for gold under a soft landing or further hawkish moves from the Fed is significantly less than the upside in the event of a growth shock pushing the US economy into recession. However, it might be challenging for gold to cross the USD2,100 per ounce threshold without the Fed resorting to rate cuts in response to a recession that necessitates pivoting towards growth support.

EUR USD - FUNDAMENTAL ANALYSIS Quarterly US dollar fundamental forecast In the second reading, Germany's GDP for the second quarter was reduced to -0.3%, which indicates a technical recession. This pushed EURUSD to a two-month low and allowed the price to hit the first of two short targets at 1.0715 and 1.0665. If the situation in the other leading economies of the eurozone does not change, the currency union is likely to face stagnation. How, then, will the euro compete with the US dollar? Dynamics of the economies of the USA, Germany and the eurozone In fact, the largest decline in German industrial production in 12 months and a sharp drop in retail sales in March predicted such a negative result. According to Commerzbank, the German economy will contract by 0.3% in 2023. This forecast contrasts the German government's 0.2% and 0.1% IMF growth expectations. Unpleasant surprises from the German economy could make ECB officials cautious. As a result, the deposit rate may not reach the 3.75% expected by the market and Bloomberg experts. This will be another blow to EURUSD, especially since derivatives have already considered a 25 bps federal funds rate hike in July. Dynamics of market expectations for the Fed rate If the divergence in monetary policy is not as big as expected, and the eurozone economy does not meet expectations, USD strengthening against the euro looks logical. However, there is a fly in the ointment in the barrel of honey for EURUSD bears. The debt ceiling. Despite the fact that the deal has not yet been concluded, the chances are high. Republicans are pushing for cutting discretionary spending in 2024 to 2022 levels and maintaining its 1% annual increase for a decade. This means a $3.3 trillion decrease in total budget spending by 2033 compared to the current Congressional Budget Office forecast. Democrats are ready to reduce it by only $1 trillion. The truth lies somewhere in between. However, in any case, this will lead to a slowdown in the US economy. According to Bloomberg estimates, limiting government spending for 3-5 years could decrease employment by 340 thousand by the end of 2024. This is painful but still better than a default. On June 15, the Treasury needs to repay $2 billion in treasuries. If this does not happen, Moody's will be forced to downgrade its credit rating from AAA to AA1. Quarterly EURUSD trading plan Thus, the weakness of the European GDP hints that the EURUSD level just below 1.11 serves as the high, which is unlikely to be overcome over the next few months. Therefore, short trades in 1.104-1.1055 were opened very reasonably. However, the gradual cooling of the US economy is a strong argument in favor of the fact that there will be no parity. Thus, expect mid-term euro consolidation in the $1.06-1.095. Be ready to sell the pair on the rise and buy on the decline.

DOLLAR INDEX - FUNDAMENTAL ANALYSIS Economists at UBS, led by Chief US Economist Jonathan Pingle, have also explored potential market reactions to a breach of the X-date. Notably, the US Dollar (USD), Japanese Yen (JPY), and Gold emerge as key assets that could be significantly influenced. In most scenarios, Pingle anticipates a softening of the US Dollar amidst rising uncertainty. Interestingly, the only scenario where the US Dollar might rally strongly would involve a month-long impasse after the X-date. This extended deadlock could cause a significant tightening of financing conditions, boosting the USD in the process. "Only a 1m long impasse post the X-date is likely to cause a tightening of financing conditions sharp enough that it causes the dollar to rally strongly." says Pingle. In contrast, he suggests the worst-case scenario for the dollar arises if the X-date is crossed without any default. The fear of de-dollarisation, the process where the dominance of USD in the global financial system is gradually reduced, becomes a tangible threat in this case. "The worst case for the dollar is if the X-date is crossed without default; de-dollarisation becomes a real threat in this case." he adds. Pingle believes that, from a risk hedging perspective, long positions in Japanese Yen against currencies such as the Australian Dollar (AUD) and Canadian Dollar (CAD) as well as calls on Gold might be the cleanest strategies in the event of a US default. "JPY longs against AUD and CAD and Gold calls are the cleanest ways to hedge against a US default." says Pingle. He further suggests that Gold could fare well across all levels of uncertainty and potential default scenarios. "We see Gold doing well through all levels of uncertainty and default." he adds. In essence, these projections underscore the importance of being prepared for a range of outcomes, as the implications of the current debt ceiling impasse could be far-reaching and diverse across the financial landscape. Debt Ceiling Conundrum: Economists at UBS Unveil Four Possible Scenarios Economists at UBS suggest that there are four potential scenarios that may unfold due to the current impasse over the US debt ceiling. The scenarios, laid out by Jonathan Pingle, Chief US Economist at UBS, range from the most optimistic - in which the debt ceiling is lifted with minor volatility - to the most pessimistic, where a month-long impasse creates significant economic strain. Scenario 1: The Debt Ceiling is Lifted Amid Market Noise The first scenario that Pingle describes involves the debt ceiling being raised ahead of any missed payments, causing some market turbulence but averting significant damage. This echoes previous political disagreements in 2011 and 2013, where market volatility was relatively short-lived, lasting no more than a few weeks. "The economic impact under this scenario depends almost entirely on the level and duration of disruption that increased uncertainty might create for financial markets." says Pingle. He adds, "We assume in this scenario that any financial volatility would be short-lived, lasting no more than a few weeks." Scenario 2: The Debt Ceiling is Breached but Debt Payments are Prioritised The second scenario involves the Treasury surpassing the so-called X-date but continuing to honour debt service payments. This could result in a significant retrenchment in federal spending as revenues cover only around 75% of non-interest expenditures. "In this scenario, the Treasury goes past the X-date but debt service payments continue to be made." says Pingle. However, he warns that this scenario could have a more detrimental effect on the economy. "The economic outlook is a little weaker... The Federal Reserve likely sees profound institutional risk being thrust into this political fight over fiscal policy." he adds. Scenario 3: Principal and Interest Payments are Delayed after Breaching the X-date The third scenario Pingle presents assumes that the US misses interest payments by more than a three-day grace period, leading to a formal default and probable downgrades. "In this scenario, interest payments are missed and we've assumed by more than the 3- day grace period (i.e. a week) so that we can model a formal default and downgrades that would likely come with that default." says the analyst. He continues, "In this scenario the US faces more serious downgrade risk, CDS default triggers, and downgrades to the GSEs." This, according to Pingle, could potentially lead to immediate consequences for the global financial system, given the USD and US Treasury Securities' status as the world's main reserve currency and 'safe' asset, respectively. Scenario 4: A Prolonged, Month-long Standoff The final scenario, which Pingle describes as highly unlikely, would see a month-long impasse in the US political system over the debt ceiling issue. This scenario, according to the analyst, could have the most significant impact on the economy, potentially doubling the severity of the recession in the US and leading to an estimated job loss of around 700,000. "We give such an outcome very low odds... In this scenario, we could debate the path, but a large negative shock to growth at the current juncture we would argue sends the target range for the federal funds rate back to the zero lower bound." says Pingle. "Depending on the speed of the market moves and if things become disorderly, we would expect the FOMC to 50 bp rate cuts in the next two meetings to see if that helped mitigate market disruption." he adds.

EUR USD - FUNDAMENTAL ANALYSIS Economists at UBS, led by Chief US Economist Jonathan Pingle, have also explored potential market reactions to a breach of the X-date. Notably, the US Dollar (USD), Japanese Yen (JPY), and Gold emerge as key assets that could be significantly influenced. In most scenarios, Pingle anticipates a softening of the US Dollar amidst rising uncertainty. Interestingly, the only scenario where the US Dollar might rally strongly would involve a month-long impasse after the X-date. This extended deadlock could cause a significant tightening of financing conditions, boosting the USD in the process. "Only a 1m long impasse post the X-date is likely to cause a tightening of financing conditions sharp enough that it causes the dollar to rally strongly." says Pingle. In contrast, he suggests the worst-case scenario for the dollar arises if the X-date is crossed without any default. The fear of de-dollarisation, the process where the dominance of USD in the global financial system is gradually reduced, becomes a tangible threat in this case. "The worst case for the dollar is if the X-date is crossed without default; de-dollarisation becomes a real threat in this case." he adds. Pingle believes that, from a risk hedging perspective, long positions in Japanese Yen against currencies such as the Australian Dollar (AUD) and Canadian Dollar (CAD) as well as calls on Gold might be the cleanest strategies in the event of a US default. "JPY longs against AUD and CAD and Gold calls are the cleanest ways to hedge against a US default." says Pingle. He further suggests that Gold could fare well across all levels of uncertainty and potential default scenarios. "We see Gold doing well through all levels of uncertainty and default." he adds. In essence, these projections underscore the importance of being prepared for a range of outcomes, as the implications of the current debt ceiling impasse could be far-reaching and diverse across the financial landscape. Debt Ceiling Conundrum: Economists at UBS Unveil Four Possible Scenarios Economists at UBS suggest that there are four potential scenarios that may unfold due to the current impasse over the US debt ceiling. The scenarios, laid out by Jonathan Pingle, Chief US Economist at UBS, range from the most optimistic - in which the debt ceiling is lifted with minor volatility - to the most pessimistic, where a month-long impasse creates significant economic strain. Scenario 1: The Debt Ceiling is Lifted Amid Market Noise The first scenario that Pingle describes involves the debt ceiling being raised ahead of any missed payments, causing some market turbulence but averting significant damage. This echoes previous political disagreements in 2011 and 2013, where market volatility was relatively short-lived, lasting no more than a few weeks. "The economic impact under this scenario depends almost entirely on the level and duration of disruption that increased uncertainty might create for financial markets." says Pingle. He adds, "We assume in this scenario that any financial volatility would be short-lived, lasting no more than a few weeks." Scenario 2: The Debt Ceiling is Breached but Debt Payments are Prioritised The second scenario involves the Treasury surpassing the so-called X-date but continuing to honour debt service payments. This could result in a significant retrenchment in federal spending as revenues cover only around 75% of non-interest expenditures. "In this scenario, the Treasury goes past the X-date but debt service payments continue to be made." says Pingle. However, he warns that this scenario could have a more detrimental effect on the economy. "The economic outlook is a little weaker... The Federal Reserve likely sees profound institutional risk being thrust into this political fight over fiscal policy." he adds. Scenario 3: Principal and Interest Payments are Delayed after Breaching the X-date The third scenario Pingle presents assumes that the US misses interest payments by more than a three-day grace period, leading to a formal default and probable downgrades. "In this scenario, interest payments are missed and we've assumed by more than the 3- day grace period (i.e. a week) so that we can model a formal default and downgrades that would likely come with that default." says the analyst. He continues, "In this scenario the US faces more serious downgrade risk, CDS default triggers, and downgrades to the GSEs." This, according to Pingle, could potentially lead to immediate consequences for the global financial system, given the USD and US Treasury Securities' status as the world's main reserve currency and 'safe' asset, respectively. Scenario 4: A Prolonged, Month-long Standoff The final scenario, which Pingle describes as highly unlikely, would see a month-long impasse in the US political system over the debt ceiling issue. This scenario, according to the analyst, could have the most significant impact on the economy, potentially doubling the severity of the recession in the US and leading to an estimated job loss of around 700,000. "We give such an outcome very low odds... In this scenario, we could debate the path, but a large negative shock to growth at the current juncture we would argue sends the target range for the federal funds rate back to the zero lower bound." says Pingle. "Depending on the speed of the market moves and if things become disorderly, we would expect the FOMC to 50 bp rate cuts in the next two meetings to see if that helped mitigate market disruption." he adds.

USD JPY - FUNDAMENTAL ANALYSIS Foreign exchange analysts at Goldman Sachs still expect that the US Dollar to lose ground over 2023 as a whole, but expect this will take longer than expected previously due to US and global developments. It notes; “Our underlying view for FX markets this year is that we are likely to see only a “bumpy deceleration” for the Dollar, because slack in the US economy is still limited, and we are still “waiting for a challenger.” The 3-month Dollar to Yen (USD/JPY) exchange rate has been revised higher to 140 from 132 previously while the 6-month forecast has been revised to 135 from 125. The 12-month forecast remains at 125.0. From a longer-term perspective, Goldman still expects that the dollar will lose ground, but it considers that the short-term perspective has changed slightly. It adds; “we think the recent rally in the broad Dollar more appropriately reflects the fine balance facing currency markets at the moment.” Goldman points out that the US economy has performed more strongly than expected after the Silicon Valley Bank collapse in March. According to Goldman; “In the US, recent data on credit conditions have been a bit better than feared. And cost pressures have eased somewhat but remain a top priority, so that a number of Fed officials have said they still see some risk that rates may ultimately have to rise further.” Another key element for exchange rates is that dollar selling necessitates the buying of another currency. In this context, Goldman is less confident that there are attractive alternatives. The narrative earlier in the year was of a strong rebound in China and notable resilience in the Euro-Zone. Both these elements have come into doubt over the next few weeks. The Bank of Japan has also not engaged in any shift in monetary policy with the ceiling for the 10-year yield held at 0.5%. The delay in tightening policy has undermined the yen in global markets. Goldman adds; “Dollar depreciation usually coincides with strong activity in the rest of the world, not US underperformance. We think recent developments all support this view, and should also support some further Dollar strength over the near term.” The 3,6 and 12-month Euro to Dollar (EUR/USD) exchange rate forecasts are unchanged at 1.05,1.05 and 1.10 respectively.

GOLD FUNDAMENTAL ANALYSIS Economists at UBS, led by Chief US Economist Jonathan Pingle, have also explored potential market reactions to a breach of the X-date. Notably, the US Dollar (USD), Japanese Yen (JPY), and Gold emerge as key assets that could be significantly influenced. In most scenarios, Pingle anticipates a softening of the US Dollar amidst rising uncertainty. Interestingly, the only scenario where the US Dollar might rally strongly would involve a month-long impasse after the X-date. This extended deadlock could cause a significant tightening of financing conditions, boosting the USD in the process. "Only a 1m long impasse post the X-date is likely to cause a tightening of financing conditions sharp enough that it causes the dollar to rally strongly." says Pingle. In contrast, he suggests the worst-case scenario for the dollar arises if the X-date is crossed without any default. The fear of de-dollarisation, the process where the dominance of USD in the global financial system is gradually reduced, becomes a tangible threat in this case. "The worst case for the dollar is if the X-date is crossed without default; de-dollarisation becomes a real threat in this case." he adds. Pingle believes that, from a risk hedging perspective, long positions in Japanese Yen against currencies such as the Australian Dollar (AUD) and Canadian Dollar (CAD) as well as calls on Gold might be the cleanest strategies in the event of a US default. "JPY longs against AUD and CAD and Gold calls are the cleanest ways to hedge against a US default." says Pingle. He further suggests that Gold could fare well across all levels of uncertainty and potential default scenarios. "We see Gold doing well through all levels of uncertainty and default." he adds. In essence, these projections underscore the importance of being prepared for a range of outcomes, as the implications of the current debt ceiling impasse could be far-reaching and diverse across the financial landscape. Debt Ceiling Conundrum: Economists at UBS Unveil Four Possible Scenarios Economists at UBS suggest that there are four potential scenarios that may unfold due to the current impasse over the US debt ceiling. The scenarios, laid out by Jonathan Pingle, Chief US Economist at UBS, range from the most optimistic - in which the debt ceiling is lifted with minor volatility - to the most pessimistic, where a month-long impasse creates significant economic strain. Scenario 1: The Debt Ceiling is Lifted Amid Market Noise The first scenario that Pingle describes involves the debt ceiling being raised ahead of any missed payments, causing some market turbulence but averting significant damage. This echoes previous political disagreements in 2011 and 2013, where market volatility was relatively short-lived, lasting no more than a few weeks. "The economic impact under this scenario depends almost entirely on the level and duration of disruption that increased uncertainty might create for financial markets." says Pingle. He adds, "We assume in this scenario that any financial volatility would be short-lived, lasting no more than a few weeks." Scenario 2: The Debt Ceiling is Breached but Debt Payments are Prioritised The second scenario involves the Treasury surpassing the so-called X-date but continuing to honour debt service payments. This could result in a significant retrenchment in federal spending as revenues cover only around 75% of non-interest expenditures. "In this scenario, the Treasury goes past the X-date but debt service payments continue to be made." says Pingle. However, he warns that this scenario could have a more detrimental effect on the economy. "The economic outlook is a little weaker... The Federal Reserve likely sees profound institutional risk being thrust into this political fight over fiscal policy." he adds. Scenario 3: Principal and Interest Payments are Delayed after Breaching the X-date The third scenario Pingle presents assumes that the US misses interest payments by more than a three-day grace period, leading to a formal default and probable downgrades. "In this scenario, interest payments are missed and we've assumed by more than the 3- day grace period (i.e. a week) so that we can model a formal default and downgrades that would likely come with that default." says the analyst. He continues, "In this scenario the US faces more serious downgrade risk, CDS default triggers, and downgrades to the GSEs." This, according to Pingle, could potentially lead to immediate consequences for the global financial system, given the USD and US Treasury Securities' status as the world's main reserve currency and 'safe' asset, respectively. Scenario 4: A Prolonged, Month-long Standoff The final scenario, which Pingle describes as highly unlikely, would see a month-long impasse in the US political system over the debt ceiling issue. This scenario, according to the analyst, could have the most significant impact on the economy, potentially doubling the severity of the recession in the US and leading to an estimated job loss of around 700,000. "We give such an outcome very low odds... In this scenario, we could debate the path, but a large negative shock to growth at the current juncture we would argue sends the target range for the federal funds rate back to the zero lower bound." says Pingle. "Depending on the speed of the market moves and if things become disorderly, we would expect the FOMC to 50 bp rate cuts in the next two meetings to see if that helped mitigate market disruption." he adds.

DOLLAR INDEX - FUNDAMENTAL ANALYSIS Economists at UBS, led by Chief US Economist Jonathan Pingle, have also explored potential market reactions to a breach of the X-date. Notably, the US Dollar (USD), Japanese Yen (JPY), and Gold emerge as key assets that could be significantly influenced. In most scenarios, Pingle anticipates a softening of the US Dollar amidst rising uncertainty. Interestingly, the only scenario where the US Dollar might rally strongly would involve a month-long impasse after the X-date. This extended deadlock could cause a significant tightening of financing conditions, boosting the USD in the process. "Only a 1m long impasse post the X-date is likely to cause a tightening of financing conditions sharp enough that it causes the dollar to rally strongly." says Pingle. In contrast, he suggests the worst-case scenario for the dollar arises if the X-date is crossed without any default. The fear of de-dollarisation, the process where the dominance of USD in the global financial system is gradually reduced, becomes a tangible threat in this case. "The worst case for the dollar is if the X-date is crossed without default; de-dollarisation becomes a real threat in this case." he adds. Pingle believes that, from a risk hedging perspective, long positions in Japanese Yen against currencies such as the Australian Dollar (AUD) and Canadian Dollar (CAD) as well as calls on Gold might be the cleanest strategies in the event of a US default. "JPY longs against AUD and CAD and Gold calls are the cleanest ways to hedge against a US default." says Pingle. He further suggests that Gold could fare well across all levels of uncertainty and potential default scenarios. "We see Gold doing well through all levels of uncertainty and default." he adds. In essence, these projections underscore the importance of being prepared for a range of outcomes, as the implications of the current debt ceiling impasse could be far-reaching and diverse across the financial landscape. Debt Ceiling Conundrum: Economists at UBS Unveil Four Possible Scenarios Economists at UBS suggest that there are four potential scenarios that may unfold due to the current impasse over the US debt ceiling. The scenarios, laid out by Jonathan Pingle, Chief US Economist at UBS, range from the most optimistic - in which the debt ceiling is lifted with minor volatility - to the most pessimistic, where a month-long impasse creates significant economic strain. Scenario 1: The Debt Ceiling is Lifted Amid Market Noise The first scenario that Pingle describes involves the debt ceiling being raised ahead of any missed payments, causing some market turbulence but averting significant damage. This echoes previous political disagreements in 2011 and 2013, where market volatility was relatively short-lived, lasting no more than a few weeks. "The economic impact under this scenario depends almost entirely on the level and duration of disruption that increased uncertainty might create for financial markets." says Pingle. He adds, "We assume in this scenario that any financial volatility would be short-lived, lasting no more than a few weeks." Scenario 2: The Debt Ceiling is Breached but Debt Payments are Prioritised The second scenario involves the Treasury surpassing the so-called X-date but continuing to honour debt service payments. This could result in a significant retrenchment in federal spending as revenues cover only around 75% of non-interest expenditures. "In this scenario, the Treasury goes past the X-date but debt service payments continue to be made." says Pingle. However, he warns that this scenario could have a more detrimental effect on the economy. "The economic outlook is a little weaker... The Federal Reserve likely sees profound institutional risk being thrust into this political fight over fiscal policy." he adds. Scenario 3: Principal and Interest Payments are Delayed after Breaching the X-date The third scenario Pingle presents assumes that the US misses interest payments by more than a three-day grace period, leading to a formal default and probable downgrades. "In this scenario, interest payments are missed and we've assumed by more than the 3- day grace period (i.e. a week) so that we can model a formal default and downgrades that would likely come with that default." says the analyst. He continues, "In this scenario the US faces more serious downgrade risk, CDS default triggers, and downgrades to the GSEs." This, according to Pingle, could potentially lead to immediate consequences for the global financial system, given the USD and US Treasury Securities' status as the world's main reserve currency and 'safe' asset, respectively. Scenario 4: A Prolonged, Month-long Standoff The final scenario, which Pingle describes as highly unlikely, would see a month-long impasse in the US political system over the debt ceiling issue. This scenario, according to the analyst, could have the most significant impact on the economy, potentially doubling the severity of the recession in the US and leading to an estimated job loss of around 700,000. "We give such an outcome very low odds... In this scenario, we could debate the path, but a large negative shock to growth at the current juncture we would argue sends the target range for the federal funds rate back to the zero lower bound." says Pingle. "Depending on the speed of the market moves and if things become disorderly, we would expect the FOMC to 50 bp rate cuts in the next two meetings to see if that helped mitigate market disruption." he adds.

EUR USD - FUNDAMENTAL ANALYSIS Economists at UBS, led by Chief US Economist Jonathan Pingle, have also explored potential market reactions to a breach of the X-date. Notably, the US Dollar (USD), Japanese Yen (JPY), and Gold emerge as key assets that could be significantly influenced. In most scenarios, Pingle anticipates a softening of the US Dollar amidst rising uncertainty. Interestingly, the only scenario where the US Dollar might rally strongly would involve a month-long impasse after the X-date. This extended deadlock could cause a significant tightening of financing conditions, boosting the USD in the process. "Only a 1m long impasse post the X-date is likely to cause a tightening of financing conditions sharp enough that it causes the dollar to rally strongly." says Pingle. In contrast, he suggests the worst-case scenario for the dollar arises if the X-date is crossed without any default. The fear of de-dollarisation, the process where the dominance of USD in the global financial system is gradually reduced, becomes a tangible threat in this case. "The worst case for the dollar is if the X-date is crossed without default; de-dollarisation becomes a real threat in this case." he adds. Pingle believes that, from a risk hedging perspective, long positions in Japanese Yen against currencies such as the Australian Dollar (AUD) and Canadian Dollar (CAD) as well as calls on Gold might be the cleanest strategies in the event of a US default. "JPY longs against AUD and CAD and Gold calls are the cleanest ways to hedge against a US default." says Pingle. He further suggests that Gold could fare well across all levels of uncertainty and potential default scenarios. "We see Gold doing well through all levels of uncertainty and default." he adds. In essence, these projections underscore the importance of being prepared for a range of outcomes, as the implications of the current debt ceiling impasse could be far-reaching and diverse across the financial landscape. Debt Ceiling Conundrum: Economists at UBS Unveil Four Possible Scenarios Economists at UBS suggest that there are four potential scenarios that may unfold due to the current impasse over the US debt ceiling. The scenarios, laid out by Jonathan Pingle, Chief US Economist at UBS, range from the most optimistic - in which the debt ceiling is lifted with minor volatility - to the most pessimistic, where a month-long impasse creates significant economic strain. Scenario 1: The Debt Ceiling is Lifted Amid Market Noise The first scenario that Pingle describes involves the debt ceiling being raised ahead of any missed payments, causing some market turbulence but averting significant damage. This echoes previous political disagreements in 2011 and 2013, where market volatility was relatively short-lived, lasting no more than a few weeks. "The economic impact under this scenario depends almost entirely on the level and duration of disruption that increased uncertainty might create for financial markets." says Pingle. He adds, "We assume in this scenario that any financial volatility would be short-lived, lasting no more than a few weeks." Scenario 2: The Debt Ceiling is Breached but Debt Payments are Prioritised The second scenario involves the Treasury surpassing the so-called X-date but continuing to honour debt service payments. This could result in a significant retrenchment in federal spending as revenues cover only around 75% of non-interest expenditures. "In this scenario, the Treasury goes past the X-date but debt service payments continue to be made." says Pingle. However, he warns that this scenario could have a more detrimental effect on the economy. "The economic outlook is a little weaker... The Federal Reserve likely sees profound institutional risk being thrust into this political fight over fiscal policy." he adds. Scenario 3: Principal and Interest Payments are Delayed after Breaching the X-date The third scenario Pingle presents assumes that the US misses interest payments by more than a three-day grace period, leading to a formal default and probable downgrades. "In this scenario, interest payments are missed and we've assumed by more than the 3- day grace period (i.e. a week) so that we can model a formal default and downgrades that would likely come with that default." says the analyst. He continues, "In this scenario the US faces more serious downgrade risk, CDS default triggers, and downgrades to the GSEs." This, according to Pingle, could potentially lead to immediate consequences for the global financial system, given the USD and US Treasury Securities' status as the world's main reserve currency and 'safe' asset, respectively. Scenario 4: A Prolonged, Month-long Standoff The final scenario, which Pingle describes as highly unlikely, would see a month-long impasse in the US political system over the debt ceiling issue. This scenario, according to the analyst, could have the most significant impact on the economy, potentially doubling the severity of the recession in the US and leading to an estimated job loss of around 700,000. "We give such an outcome very low odds... In this scenario, we could debate the path, but a large negative shock to growth at the current juncture we would argue sends the target range for the federal funds rate back to the zero lower bound." says Pingle. "Depending on the speed of the market moves and if things become disorderly, we would expect the FOMC to 50 bp rate cuts in the next two meetings to see if that helped mitigate market disruption." he adds.