WisdomTree Minds on the Markets
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Minds on the Markets
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Minds on the Markets
Archive: November 13, 2023
2024’s Disinflationary Theme Comes Courtesy of Overseas Players
Times are tough for Germany. The country’s future consumer sentiment index fell to -28.7 in November, the third deterioration in a row for a series that has been largely in negative territory since COVID-19.
With dour sentiment in the world’s fourth-largest economy, it’s little surprise that the euro is changing hands for less than $1.07, down from $1.21 in 2021. Though the euro rallied slightly this fall, the current near-parity exchange rate is among the lowest levels seen for the common currency since the turn of the century. Critically, because Germany is such a large eurozone anchor, the 14.7% year-over-year dump in its producer price index makes you start thinking about the whole of Europe dropping low-priced goods and services onto U.S. inflation figures in 2024.
Most goods imported to the U.S. come from China, right? Wrong. Last year, China’s first-place ranking amounted to $537 billion worth of the country’s goods being imported into the U.S. But ranked right behind it were Mexico and Canada, at $455 billion and $438 billion, respectively. Of the U.S.’s three largest trade partners, two have currencies that have been weakening hard. China’s renminbi was trading as strong as CNY6.31 to the dollar last year, but in recent sessions, it has been changing hands at CNY7.29. That is a bold weakening.
The Mexican peso is waving off the euro and renminbi and doing the opposite: getting some life for once. You may recall when inflation spiked a couple years back that, unlike the Fed and the European Central Bank, a handful of emerging market central banks decided to do something more than shout “transitory.” Because of their destabilizing experiences with 20th-century hyperinflation, countries like Hungary and Mexico aggressively ratcheted up interest rates as soon as the whiff of inflation hit a few years back.
Banxico’s policy rate is currently 11.25%. Are you ready for its October inflation print? It was just +4.3% year-over-year, a level for that country that is positively benign. With overnight money offering a spread of about 700 basis points over that inflation figure, it is little surprise that the Mexican peso is behaving like the Swiss franc. During the original COVID-19 panic, you could pick it up for MXN25 to the dollar. Unlike the euro and renminbi, the peso won’t stop rallying; the exchange rate is now MXN17.6. Okay, the U.S. won’t catch cheap Mexican goods in 2024.
But last time we checked, the U.S. has two borders. The Canadian dollar is the anti-peso at the moment. One U.S. dollar will fetch you C$1.38 up there, an exchange rate that makes you start thinking about canceling your 2024 Florida beach trip in favor of a romantic jaunt to Montreal. What a far cry from the old oil spike years in the aughts when the loonie had some brief spells on the other side of parity. Like Germany, Canada’s PPI is also negative, falling 0.6% year-over-year. To put some finishing touches on the deflationary goose, there is a liquidation going on in Toronto housing that is unnerving at best. The speculative impulse up there is on tenterhooks, with Canada’s condo-flipping parlor game screeching to a halt. Inflationary is not a word we think of when we think about Canada in 2024.
If you think these deflationary forces are bold, let’s not forget that the Japanese yen was briefly trading for ¥103 in 2021 and has now collapsed to ¥151. Count them: Germany, China, Canada, Japan and, okay, not Mexico. The count is four out of five major trade partners who have seen their currencies boldly weaken versus the U.S. dollar in recent years. This is deflationary, or at least disinflationary, in the coming months and quarters. The solution to inflation may ultimately come from the Fed, but the truth of the matter is this: U.S. trade partners are acting as a supporting cast in this disinflationary movie.
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