Chart of the Month
There is a debate raging over the characterisation of the US Dollar: is it a defensive currency that performs better in a risk-off environment or has it entered a structurally weak phase that may stretch over a number of years? Perhaps the latter; it seems that the high tide for international – especially Asian – participation in US securities markets has passed. A fundamental reconsideration of the role of the US Dollar could undermine its traditional role as a protective international asset in volatile markets.
As one of the largest energy importers, Japan accrued a significant benefit from the collapse of the oil price from the summer of 2014. Japan’s trade balance improved from a deficit of Y1.5tr to a surplus of Y350bn. As the chart shows, the best correlation is between Brent front-month futures prices (6-month lead) and Japan’s trade balance (seasonally adjusted). However, the recent surge in crude oil prices, by more than US$20 per barrel, is indicative of a reversal in the Japanese external position over the next 6 months. The 6-month Brent lead suggests that we should see Japan’s trade balance falling back into deficit by mid-year, prompting the question of how the Yen will react to this development.
Historically, lows in the US unemployment percentage – using the standard U3 measure from the Bureau of Labor Statistics – have been associated with low points in the US government budget deficit. Indeed, some were associated with budget surpluses. This correlation broke down about 3 years ago when the public finances began to deteriorate even as the unemployment rate plunged lower. On the CBO’s projections, the budget deficit will rise to 5 per cent of GDP in the mid-2020s even on the assumption of a steady 5 per cent unemployment rate. This loss of fiscal sensitivity is extremely worrying for the authorities as it suggests that the corporate sector has become a voluntary taxpayer.
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