Credit Suisse notes that the markets continue to show little concern about the US debt ceiling. This is because the US Treasury Secretary, Janet Yellen, has indicated that defaults could be avoided past the 1st June date, possibly by a number of weeks.

While this has resulted in some calmness in the markets, the bank suggests that this could be deceptive and potentially provide the possibility of relatively cheap hedges. The volatility in both USDJPY and EURUSD 2m implied is near one-year lows. This matches the realised volatility over the past two months.

However, in the event of a shock bad outcome to debt ceiling talks, US bond markets could become very volatile. Picking a direction for USD in the event of a debt default is challenging. Though in theory, the currency should suffer due to self-inflicted problems and a likely growth shock, a USD funding shock could arise that initially boosts the greenback.

Therefore, Credit Suisse suggests that hedges playing for higher FX volatility are a better option than those looking for clear and consistent directionality.