On Thursday, the US dollar fell in a weakened pre-New Year trade, retreating from a 14-year high against a basket of currencies, while investors are taking profits in anticipation of the end of the year.
A bankruptcy on US government debt is a serious threat to the economies of the world, but we do not have to be afraid of it any time soon. Now lenders are more concerned not so much of the size of public debt, as an America's capability to service it. However, the difficulty can appear only in the event if one of the largest holders of US bonds will start to gradually get rid of them. This trend is already defined, but its pace is not sufficient for a soon detection of the debt crisis. In addition, the US dollar is right to retain the status of a "reserve currency" and get rid of this status would not be far-sighted decision amid world uncertainty.
But maybe it's not all so terrible? Technically America can pay off its debt, no matter how large it is, at any time. The thing is, that the very government debt is denominated in US dollars, which the Federal Reserve can print as much as necessary and pay. Of course, it will cause many other problems such as an increase in inflation and a removal of the dollar from the pedestal of the world's reserve currency. Yet in this way the debt can be paid off, and it gives hope to the creditors that the probability of a sudden default is very low.
Inside America there are political forces who are concerned about the growth of public debt not less than external lenders. The Republicans in the Parliament actively impeded increase government debt ceiling in 2013. In result the annual budget for the next year was not accepted, there wasn't enough money to pay for the work of government departments, after which the government virtually stopped its work for 16 days. Situation was close to default, and just one day before its announcement Republicans surrendered their positions, the ceiling of external loans was removed and other than that it's been declared a moratorium on the upper limit of public debt until March 2017. It may be noted that since 2013 the rate of growth of public debt have increased, and as already mentioned, new records were set.
On September 30, US 2016 fiscal year was completed. It was one of the brightest in the history of world's largest economy. Unfortunately, the most spectacular is the huge increase in the national debt, by $1.4 trillion dollars, the total amount of which it is now 19,573 trln. dollars. The very figure seems daunting, but even more excitement is that the pace at which it grows.
Economic forecasts
The US Federal Reserve raised its key interest rate by 0.25%. The regulator also increased the forecast for the number of rate increases in 2017.
The reasons the Fed wants to increase the interest rate are few as two members even voted for the immediate lifting. In addition there are also improvements in the US economy as consumer spending, which are on the rise, job growth, low unemployment, higher consumer prices and housing market. These improvements led to a rapid increase in inflation and to avoid this Fed should immediately raise interest rates.
The last time the Fed tightened monetary policy was in December 2015, but that will change after a few days, as the US central bank is preparing to raise interest rates for the first time this year.
On Friday, the dollar rose against the basket of major currencies against the background of increased expectations that the Fed this week will raise the interest rate.
The US dollar still will grow today in terms of published in China moderately pessimistic statistics on the trade balance for November. The reduction reached 44.61 billion yuan, against 49.06 in October. At the same time for January-November the total amount of China's foreign trade decreased by 6.9% compared to the previous year and amounted to $3.31 trillion. Despite the fact that the values for the previous month was even worse, and it would be necessary to wait for the optimism of investors, actual data will be more representative at the end of the year. That's why for the USD/JPY pair there is a prospect of growth by the end of the day.
In the center of attention today is the interest rate decision (12:45 GMT) and the ECB press conference (13:30 GMT), from which the mood of the market will change (after being announced the decision and held a press conference). Volatility is expected to be high, in connection with which traders have to be passive in the afternoon. To predict and forecast the behavior of traders, given the fact that on the calendar is December, is quite difficult (perhaps influential mass will want to start pre-Christmas rally with events such as the ECB interest rate). Technically, there is a power for upside movement, because breaking up the 1.0780 level will allow growth to 1.0850. In the case where 1.0780 is not broken up, the reduction may be limited by the support 1.0650.
On Tuesday, the euro stabilized, bounced off 20-month lows reached during the previous session after Italian voters rejected constitutional reforms proposed by the government, forcing the prime minister Renzi to resign.
Statement by the People's Bank of China for the new package of measures to tighten control over the work of banks in order to eliminate the shadow banking sector, in this context, is more like a diversion measure, rather than a real promise. China's shadow market poses no particular risk for micro-economic indicators of the country mainly because it is actually not internationally integrated. Cases of fraud with credit lines, decorated as an investment, are plenty in China and whatever actions the regulator takes, it's unlikely to reduce their number - too large is the population and too high is the proportion of small and medium-sized businesses in the economy. However, to direct interests of the banks in the foreign exchange market's side these measures are quite capable.
As for the strengthening of the internal market, then China will definitely have something to brag about. A recent day of sales in China, last November 11 (the so-called Single's Day, an analogue of the Western Black Friday) brought retail chains in China about 17.7 billion dollars, far exceeding the totals in the US Black Friday and Cyber Monday in 2015 (when they were not reached 14 bn). Of course, much of this success belongs to China's advantage in population - 1.5 billion people probably will buy more than 300 million. However, in 2015 Single's Day brought the Chinese traders about 14.6 billion dollars - which means, that in 2016 the Chinese consumer activity increased by 1/6, while the boldest forecasts for Black Friday and Cyber Monday in the US this year cannot exceed 15 billion. Of course, for the market it is a clear signal that China is a growing market for the long term, however, whether US and European investors will hear it - it is a big question. While they prefer to ignore the investment instruments, related both to the Chinese currency, and with Chinese companies (with the exception, perhaps, of bonds, although the announced issue of Eurobonds of a number of international Chinese companies do not enjoy special demand). For now the Chinese authorities manage to keep the outflow of capital from the country under control, but recent events related to the foreign exchange value of the yuan, could put the effectiveness of external investment management of China under question.