eee cine aoe Alea JPMorgan [email protected] 09 November 2012 that outcome. But avoiding the worst case requires a short-term bargain plus a long-term compromise on a scale not seen in Washington since the Clinton- FX weekly change in USD Congressional budget showdown of 1995/96. As with sausage making, this process won’t be pleasant to watch. It would be easier to return in several 1.0% weeks when the final product is ready, but for those who cannot avoid, ignore the likely volatility, and add to defensive trades. 0.5% e Washington needs at least a month to broker deferral of a decent part of the fiscal cliff before it can assume the monumental task of comprehensive fiscal eam reform next year, and the currencies most vulnerable to an impasse are , expensive. If no grand bargain is reached before the end of the year, full implementation of the cliff implies enough fiscal tightening to drive the dollar -0. 5% up 3%-5% versus commodity currencies, given typical patterns during global growth shocks. Even if these tax increases are reversed later in the year, the first response would be a higher USD versus all currencies but the yen, given SLO USO JPY EUR GBP CHE wen AUD how long that investors are of cyclical currencies and how short they are the TWI yen. Source: J.P. Morgan e Stay short USD/JPY and buy USD vs high-beta (AUD, NZD, SEK and GBP) in cash and options for a move of a few percent in coming weeks. In options, sell a 1-mo NZD/USD call (0.8250 strike, 0.83 RKI), buy a bearish 2-mo AUD/USD seagull (buy 1.03-1.01 put spread, sell 1.05 call) and buy a bearish 2-mo GBP/USD seagull (buy 1.57-1.55 put spread, sell 1.6250 call). Buy USD/SEK in cash. Commodities e Commodities are up some 1% this week, led by precious metals, which rallied almost 4%. The strong gains in gold are probably due to the US election result as Obama’s victory means no change to Fed policy and so continued QE and negative real yields. Gold also tends to gain when there is high fiscal unce