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As the ongoing Washington shutdown continues to give way to diverging domestic and global economic conditions, the next major hurdle for the world’s currencies, risk, and the US market will be the continuation of the budget discussion in the week ahead and the ultimate debt ceiling debate going into mid-October. We don’t expect a “grand bargain” that materially addresses long-term structural imbalances and fiscal issues.

Essentially, everyone is poised to just “kick the can further down the road,” with a few possible concessions on spending. On balance, we see a temporary slight risk-off until mid-October, risk-on until late Q4 when the Fed begins the taper discussion, and then a tapering environment where the yield curve steepens and moves higher, driving the USD higher in the first half of 2014.

Emerging market currencies will be on the defensive throughout, especially as US rates begin to rise next year and the developed world, namely the US, begins to take over being the engine of global growth from the emerging markets world.

Read Cambridge Mercantile’s October 2013 issue of Currency Insights for the latest commentary and market forecasts on whether the Fed will begin to remove monetary stimulus, or taper later this year (or in early 2014) and the impact on global currencies for the remainder of the 2013.