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Weak Currencies, High Debt and Aging Nations: Part 1

01 Aug 2024

Debt and demographics might be among the most important and least discussed factors influencing long-term movements in foreign exchange rates. From mid-2019 to mid-2024, the currencies of countries with an older population underperformed those that are younger and less heavily indebted.If this relationship continues into the second half of the decade, debt and demographic trends might give us insight into the future direction of foreign exchange rates.

The influence of debt and demographics on currency market returns is especially relevant given the significant, but uneven, increases in debt-to-GDP ratios and the of the world’s population. Since 2000, debt ratios have increased for every major economy in the world. That said, the total level of credit to the non-financial sector varies considerably, for example, from 80% of GDP in Mexico to 400% in Japan (Figure 1).

Figure 1: Public and private sector debt has grown faster than GDP in almost every country

Figure 2: The world’s population is greying with the average age rising in every major economy

Figure 3: The ratio of retirees to workers has soared unevenly around the world

Figure 4: The greater the retiree-to-working population ratio, the weaker the currency, on average

Figure 5: The higher the total debt-to-GDP ratio, the weaker, on average, a currency has been

A country by country look beginning with the extremes: Japan and Mexico

Figure 6: Mexico has an abundance of young workers supporting a small retired population

Figure 7: Japan has large numbers of retirees and a shrinking working age population

Figure 8: The BoJ is one of the few central banks that has not raised rates substantially

Figure 9: The BoJ balance sheet grew more than other central banks’ and it hasn’t shrunk since

Figure 10: Mexico raised rates faster and higher than the Fed and it isn’t cutting quickly

Figure 11: The value of the reinvested peso future has soared as the yen has declined

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