Debt matters. It has mattered for the dollar since day one, but this week the focus began to shift. Japan became a focus as the DPJ took office and set about compiling a budget for a fresh avalanche of social spending. Japan is traditionally a net exporter of capital but the market fears there will be less yen to ship offshore if Japanese government borrowing swells to the extent feared. In Japan, the JPY strengthens on budget woes, while in the west, currencies usually sink since countries like the US and UK import capital.
The UK came into focus later in the week as it became clear that its present fiscal course cannot be sustained. Draconian spending cuts and big tax hikes look likely in the very near future, not exactly the prescription to pull an economy out of a deep recession.
The EU warned of an impending budget crush in the years ahead if the economy does not revive soon.
The dollar, JPY and pound have all been affected by budget/debt woes while the Euro has remained immune. Someday, the chickens will come home to roost. In this game , timing is everything. Don’t bet the farm on an immediate shift in focus to European debt woes, but keep your eye’s peeled for a catalyst to bring the issue into the forefront in the weeks ahead.
