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The World Price Index

Released: November 15, 2016
Wild Currency Movements Evident After Trump Victory
  • Peso falls to 35% undervaluation on immigration and trade fears
  • Korean Won hits 10% undervaluation
  • Canadian Loonie 15% undervalued

The surprise victory of Donald Trump in the US Presidential election has seen a number of reactions in currency markets. The World Price Index (WPI) data for November shows that a number of economies dependent on trade with the United States such as Mexico, South Korea and Canada have seen an increase in their fundamental rate of undervaluation against the US dollar in purchasing power parity (PPP) terms.


Protectionist fears hit Peso
The Mexican peso fell by 8% on foreign exchange markets overnight and has slipped by 1.8% in its PPP undervaluation against the dollar in November. In the foreign currency markets, one dollar purchased Pesos 19.6 in November compared to a to a WPI rate of one dollar to Pesos 12.81 producing an undervaluation of 35% in PPP terms.

The election of Donald Trump, who has threatened to tackle illegal Mexican immigration by deporting up to three million and to renegotiate the North American Free Trade Agreement (NAFTA) in a more protectionist direction has created unease about the value of the Peso and future economic relations with the United States. Mexico, a home for much US manufacturing foreign investment for many years, runs a trade surplus with the United States and receives a regular flow of remittances from Mexicans working across the border. In the nine months leading up to 2016, the US imported US$218.9 billion from Mexico and exported only US$172 billion and the US accounts for just over 80% of the country’s exports. Remittances in September from the US reached US$2.3 billion in September of this year alone.

              
Korean Won weakens
South Korea, the manufacturing source of many global supply chains, with many ending in the United States, would also suffer from a more protectionist global trading environment. In November, the Korean Won weakened from 6% the previous month to an undervaluation of 10% in PPP terms. In November, one US dollar bought Won 1150 on the foreign exchange market, but the WPI rate was one dollar to Won 1039.


Canadian Looney falls
In November the Canadian dollar fell to a further undervaluation of 15% against the US dollar in PPP terms. In the markets, one US dollar bought C$1.35 against a WPI rate of C$1.14. The Canadian economy, already hit by a period of low oil prices, as a major trading with the US, will be affected by any renegotiation of NAFTA. At the same time the Canadian currency will be further weakened by a rise in the federal funds rate now expected after the presidential election is over.


About the World Price Index
The World Price Index (WPI) measures the value of an urban selection of goods and services at purchasing power parity (PPP), reflecting the real purchasing power of different nations, allowing for rapid and accurate international price comparisons. Under/Over valuation data is based on the difference between the exchange rate value of a currency and that of the US Dollar in relation to the World Price Index calculated exchange rate. Based on WPI global data the degree of currency under or over valuation in PPP terms by country, is provided in the table and chart below.
 











 

Notes to Editors

  • The World Price Index is based on original data collected by World Economics.
  • The World Price Index is released on the 2nd Working Tuesday of each month.
  • Latest month market exchange rates are calculated as an average of daily rates.


About The World Price Index

The World Price Index is calculated monthly from a basket of internationally comparable goods and services. It is designed to alleviate the horrendous problems associated with analysing economic or market data using currency market exchange rates.

Exchange rates vary with extraordinary rapidity, frequently with little obvious link to economic reality, but fatally distorting the perception of value in markets and economies. It is vital when analysing international data, whether for market analysis purposes, or to allocate resources across the globe, to review data using an international yardstick of value. This can only be done using Puchasing Power Parities (PPP), which make allowance for the purchasing power of currencies within individual countries to make comparisons based on a standard currency, usually "international dollars".

There are various sources of PPP data, but most are of only academic interest as they are years out of date. The World Price Index is the only available index updated monthly to provide an easy way of reviewing trends or relative values of market or economic data in realistic terms.


About World Economics
World Economics is an organisation dedicated to producing analysis, insight and data relating to questions of importance in understanding the world economy. Its parent company Information Sciences Ltd has a long history of the development of key business information today used throughout the world, including the origination of the Purchasing Managers Indexes in Europe and Asia (now owned by Markit), and the development of WARC a global information provider for major corporations .

Currently our primary research objective is to encourage and assist the development of better and faster measures of economic activity. In cases where we believe we can contribute directly, as opposed to through highlighting the work of others, we are producing our own measures of economic activity.

Our work is mainly of interest to investors, organisations and individuals in the financial sector and to significant corporations with global operations, as well as governments and academic economists.

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