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Commentary Topic from greenfaucet

Trade Gap and Chinese Inflation

Two quick points for today's blog:

1. The U.S. trade deficit contracted for the month of January. The gap decreased 6.6 percent to $37.3 billion from a revised $39.9 billion in December. Maybe this report will finally-but I completely have my doubts-put to rest one of the dumbest axioms on Wall Street; that a falling dollar boosts exports and can reconcile a trade imbalance. Whereas, a rising dollar discourages exports and causes a trade imbalance to increase. The dollar has been on a tear recently and increased from 78 to over 80 on the DXY during the month of January alone. That move should have, according to the specious theory, dampened the demand for U.S. exports and increased our demand for imports-thus serving to widen the gap. But the truth is that currency moves rarely have a significant effect on trade imbalances. Tax rates, wages and regulations have a much greater influence over trade than currency moves. That point has been proven over and over again throughout history.
2. China's inflation rate soared to the highest level in 16 months. That means the PBOC will raise rates shortly and may again increase reserve requirements as well. Their aim will be to curb inflation by allowing the value of the Yuan to rise. One of the major consequences of allowing the Yuan to increase is that China's demand for Treasuries must fall. Therefore, while the U.S. has just embarked on its multi-year path of a massive increase in debt issuance, China's appetite will continue to wane, just when we need to have it increase the most. The consumer and the Treasury should prepare for much higher interest expenses?