Deutsche Bank on US default possibility
The market participants regard US default as an unlikely event. Still the consequences of such outcome would be so bad, that investors start “think the unthinkable.” The closer America approaches to default and the longer the uncertainty persists, the more intense will be the flight to safe havens. According to DB, JPY, CHF, EUR and GBP will be preferred refuges (in this order). The bank doesn’t rule out USD/JPY falling to 90.00 and EUR/USD rising to $1.40.
“The longer it takes to come to a political agreement, the bigger the medium-term bearish USD consequences,” echoes Morgan Stanley.
If the technical default actually happens, it will be very damaging for USD’s long-term reserve status. Presumably the Fed and potentially other Central banks would be drawn into the fray in pursuing additional QE. “Ironically the less disruptive a technical default is, the more it would raise the probability of it happening again, adding to the prospect of more disruptive events in the future,” warns DB.