Photo: sinisterbluebox via flickr
Citi FX guru Steven Englander is not a fan of all this talk about how it might be OK to go over the “fiscal cliff” or “fiscal slope.”He writes:
We do not think that talk of a ‘fiscal slope’ rather than a cliff is realistic and most of it seems to be coming from political types rather than economists (we are still experiencing the benefits of the ‘Lehman slope’ of September 2008). If we enter 2013 with an impasse and investors come to realise that there is no impending solution, we are likely to see aggressive selling in risk-correlated FX. FX markets may be able to deal with a well-telegraphed and well-choreographed temporary nudge over the cliff – but it would have to be like the outtakes of an action movie where you see the net beneath the stuntman. On any indication that there is no net, risk-correlated FX would sell off sharply and implied vol, particularly those very cheap low delta tails on the downside of risk correlated currencies, will run up sharply.
The Fiscal Cliff is not Lehman-like, but austerity would be bad, and there has definitely been an increase in the pushback among the analyst community against the idea that hitting the Cliff would be OK.