Tuesday, January 5, 2016

Five graphs for 2016: #4, the trade weighted US$

 - by New Deal democrat

This is the second of 5 graphs to watch in 2016.  Yesterday I wrote about the yield curve.

The big story of last year was the impact of the super-strong US$, which rose 20% against some major trading partners between July 2014 and February 2015, generally trending more sideways since:

The result was a downturn in industrial production, creating a shallow industrial recession, which to date has been overbalanced by a continuing expansion in the domestic US consumer-driven economy, led by housing and cars.

Has the strengthening of the US$ run its course? Or will tightening by the Fed drive the value of the US$ even higher, perhaps enough to overcome the service sector?

Here is the graph I will be watching:  the YoY% change in the trade weighted US$ (blue) vs. the YoY% change in industrial production (red):

As you can see, industrial production tends to move inversely to the US$, with a slight lag.  The effects of a big move tend to dissipate after a year or so of stability.  If the US$ stabilizes in 2016, so most likely will industrial production.  If the US$ continues to strengthen, the industrial recession will deepen, possibly overwhelming services.