Steve Blitz Morning Notes

The hand-wringing over the depreciating dollar has begun anew and again it is focused on the wrong metrics. Currencies are supposed to change in value in order to re-balance the terms of trade. Take a look at the chart below of the 90-day percent change in the Fed's Trade-Weighted Dollar Index against the Major Currencies (Euro, Sterling, Yen, etc) where the U.S. trade deficit isn't and against the OITP (Other Important Trading Partners -- Brazil, Russia, India, China) where the U.S. trade deficit is. In the last 90-days, the dollar has depreciated near 8% against the major trading currencies and only -1.5% against the OITP.



Incredibly, but not surprisingly, the negative rate of change for the OITP shows improvement -- this is the group of currencies, notably the Yuan, where the dollar mispricing is most grievous (see chart below) considering the trade gap that was and is growing again. What the currency movements most likely reflect is a global portfolio shift out of dollar assets into UK, Euro, Japanese, Aussie and Canadian assets. But the price movement that can begin to help address trade gap with the Pacific Rim has yet to occur in earnest.