The Week Ahead: A Ticking Time Bomb?

Foreign Exchange: The Week Ahead
A Ticking Time Bomb?
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Normal everyday citizens are bound and required to keep their personal balance sheets (income and expenses) in equilibrium. If debt loads overcome income and defaults occur, there are consequences to pay inclusive of late fees, interest rate charges, collection procedures, downgrades to your credit rating and potential law suits.

Governments that run up large debts and deficits seem to be exempt from any negative political or economic repercussions, but it is not clear how much longer that will last. In the U.S., our total national debt has doubled since the Great Recession; Democrats and Republicans share equal blame for the sharp increases in debt and deficit spending. Our debt/GDP ratio has climbed from 60% in 2005 to 106% this year.

The U.S. is not the only guilty party regarding sharp increases in deficit and debt levels. World debt had been rising to unprecedented levels and has now risen to 320% of what the world actually produces. The U.S. and China are the leading debt bingers with over 60% of the world’s total. At some point, interest rates will rise, and interest costs on the national debt will correspondingly rise, creating a potential crowding out of budget priorities. The normally upbeat Fed Chairman Powell warned on Wednesday that the “federal budget is on an unsustainable path, with high and rising debt.”

For now, politicians and the general public have lost interest in this burgeoning problem. It is not on the radar screen for any of the potential Democratic Presidential candidates nor is it a priority for President Trump or the Republicans in Congress to put the brakes on spending and start balancing our books. Sooner or later, these chickens will come home to roost with potentially weaker growth and reduced budget latitude for the nation’s priorities. Higher taxes are probably in that mix.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

11/20 South Africa Expectations for rates to remain unchanged at 6.50%
11/20 Indonesia Expectations for rates to remain unchanged at 5.00%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada 

11/19 Housing Starts Expectations for a gain from 1256k to 1381k
11/21 Existing Home Sales Expectations for a gain from 5.38m to 5.49m
11/22 Serv. & Manuf. PMI Expectations for gains in both indices
11/20 Canadian CPI Expectations for a gain of 0.2%; YoY remains at 1.9%

Europe/Eurozone 

11/22 EZ Composite PMI Expectations for a gain to 50.9 from 50.6
11/22 German Manuf. PMI Expectations for an improvement from 42.1 to 42.9
11/22 U.K. Manufact. PMI Expectations for a decline from 49.6 to 48.8

Asia/Japan, and New Zealand 

11/19 Japanese Trade Expectations for a small trade surplus
11/21 Japanese Nat’l. CPI Expectations for a gain of 0.3% following a 0.2% gain

FORECASTS

EUR

The EUR became unhinged from the GBP this week as the EUR lagged behind GBP gains. This was more a function of an improving probability of a Tory majority in the U.K. Parliament regarding the December 12 vote. EZ economic data showed improvement and led some to see a bottoming in the EZ economy which aided sentiment. The EUR had its first 2-day gain since late October. Expect further consolidation with a slight upside bias.<

GBP

The GBP had a spectacular October resurgence on the back of a sharp reduction in the likelihood of a hard Brexit and PM Boris Johnson’s positive political maneuvering in Parliament. Polls favor a Tory majority on December 12, but the situation is very fluid and there is a long way to go. Tory political campaigning/posturing prior to previous elections since 2015 has been humbling. Expect a steady to slightly stronger GBP this week, but the situation will remain fluid.

JPY

The JPY has been on a broad and slow-motion weakening trend since the announcement of the resumption of trade talks back in September. Greater confidence about an eventual trade deal has allowed stronger equity performance combined with higher U.S. interest rates. Markets seem to have priced in a Phase 1 deal, but the goalposts keep moving down the field resulting in lower U.S. yields and a stronger JPY this past week. Expect more consolidation ahead with the JPY tethered to either risk on or risk off environments.

CAD

The Canadian dollar has followed a similar path to other major currencies transitioning from October to November where strength has been followed by weakness. Overall, Canadian economic fundamentals remain in good shape relative to its peer group; our RBC economist sees the CAD continuing to trade in its multi-month range of 1.3400-1.3000 for the near term. Expect a steady to slightly stronger CAD this week.

CNY

As optimism continued to build in October for a mini-breakthrough on the U.S.-China trade talks, the CNY surged and broke through the key 7.00/$ level. As the trade talks have temporarily stalled out, the CNY has been consolidating, has given up some of its gains and is back to hovering near the 7.00/$ level. Expect further consolidation this week tied to news headlines and tweets around the trade talks.

AUD

The AUD, like its other commodity brethren (CAD, NZD), has been on a rollercoaster ride since September. Net on net, all three currencies are higher by nearly 1% since September but have faded in November. The weak Aussie jobs report last week was a surprise to the markets and sent the AUD down sharply. Continue to expect the AUD to be tied to positive or negative sentiment regarding the trade talks in the short run.
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