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The Thinking Turns Around So Fast
Obviously, China has the potential to have a very important effect on where currencies are going, due to their vast reserves of dollars. Their statements are enough to send the markets into a frenzy-if a frenzy can be defined as 100 pip movements and breaking of resistances.
The fact is that the US needs to improve the trade imbalance with China. They're gettin too strong and we're getting too weak and that doesn't sit well for the world in general.The elections may have been a partial referandum on that-there is a perception here that people are losing jobs in part because of it (although the BLS says that job growth is strong). Paulson's mission at treasury is to improve the situation. How can the situation be improved?
Well, the democrats will be calling for tariffs. It's polictically popular and it makes them look like they're doing something that the general population wants. From a geo-political and free market perspective it's definately the worst idea. We need China as an allie and we need them as a market for our goods and services. Tariffs always make the other country angry and I don't think anyone in power really wants to see tariffs. However, the threat of tariffs is an important weapon that we need to keep in our back pocket. If I can make an analogy to the cold war, the the threat of tariffs is to an economic "cold war" as the threat of nuclear weapons were to the political cold war. The threat of their use is a deterent that gets the other side to come to the table to negotiate and we do need for them to come to the table.
Ideally, we would like to see China float it's currency in the free market, but that's not gonna happen anytime in the near future. They're still communist-which means they're "free-market" in anything that suits them and "unfree-market" in anything that doesn't. The Yuan trades in a defined range that they control, so any movement happens very gradually. Yes the Yuan can appreciate, but only at a "speed" that they control.
We can weaken the $. This can happen in two basic ways: CB intervention and free market movement. I'm not sure the CB wants to really be in the business of doing this and I tend to think that overall, most economists and market participants believe that things are better done in the free market. However, the government has tremendous control over how the market percieves reality. They put out all the numbers and we've all seen how numbers can be put out one way and revised totally opposite later on. They can definately exert control on the price of oil, which is the main factor in controlling inflation. So there's a lot the gov't can do behind (and in front of) the scenes to push the market toward $ devaluation.
My opinion? Well, the growing trade problem does need to be addressed and I think that's already in the process. It can never be completely "fixed" but perhaps it's rate of growth can be slowed somewhat and I think that overall, China does want the Yuan to appreciate (slowly and in a controlled way) because it's in their best interests as well. They need us to be happy with them too. The worst thing that can happen (from this perspective) is for the Fed is raise or even threaten to raise rates and I think the gov't is hoping with all it's might that the threat of inflation will slow and that the rate of growth will remain low so that the Fed can continue to stay on hold or perhaps reduce. I also think they can do a lot more the "hope".
How would I as a fundamental trader look to trade in the immediate term? Well, I think that any US numbers that are released in a $- way have the potential be strongly $-...more so then usual. I think that $+ numbers have the potential to reverse in a negative way after a $+ movement so watch for that too.
Watch for any indications that other CB's might be raising (I know, we do that aready but it's even more important now). Here's one more thing that I think will be incredibly important:
http://www.bloomberg.com/apps/news?p...d=a3b2DgV33TQQ
If that did happen there would be near equal appreciation in the GBP and EURO, with the GBP into the 9600's and the EURO in the 3200's.
*Watch for any indication that China is willing to widen the band in which it allows the Yuan to trade. It will signal immediate $ weakness for the near term, because any move to free up Yuan movement is a direct attempt to allow Yuan appreciation/$ depreciation*.
The Thinking Turns Around So Fast
Obviously, China has the potential to have a very important effect on where currencies are going, due to their vast reserves of dollars. Their statements are enough to send the markets into a frenzy-if a frenzy can be defined as 100 pip movements and breaking of resistances.
The fact is that the US needs to improve the trade imbalance with China. They're gettin too strong and we're getting too weak and that doesn't sit well for the world in general.The elections may have been a partial referandum on that-there is a perception here that people are losing jobs in part because of it (although the BLS says that job growth is strong). Paulson's mission at treasury is to improve the situation. How can the situation be improved?
Well, the democrats will be calling for tariffs. It's polictically popular and it makes them look like they're doing something that the general population wants. From a geo-political and free market perspective it's definately the worst idea. We need China as an allie and we need them as a market for our goods and services. Tariffs always make the other country angry and I don't think anyone in power really wants to see tariffs. However, the threat of tariffs is an important weapon that we need to keep in our back pocket. If I can make an analogy to the cold war, the the threat of tariffs is to an economic "cold war" as the threat of nuclear weapons were to the political cold war. The threat of their use is a deterent that gets the other side to come to the table to negotiate and we do need for them to come to the table.
Ideally, we would like to see China float it's currency in the free market, but that's not gonna happen anytime in the near future. They're still communist-which means they're "free-market" in anything that suits them and "unfree-market" in anything that doesn't. The Yuan trades in a defined range that they control, so any movement happens very gradually. Yes the Yuan can appreciate, but only at a "speed" that they control.
We can weaken the $. This can happen in two basic ways: CB intervention and free market movement. I'm not sure the CB wants to really be in the business of doing this and I tend to think that overall, most economists and market participants believe that things are better done in the free market. However, the government has tremendous control over how the market percieves reality. They put out all the numbers and we've all seen how numbers can be put out one way and revised totally opposite later on. They can definately exert control on the price of oil, which is the main factor in controlling inflation. So there's a lot the gov't can do behind (and in front of) the scenes to push the market toward $ devaluation.
My opinion? Well, the growing trade problem does need to be addressed and I think that's already in the process. It can never be completely "fixed" but perhaps it's rate of growth can be slowed somewhat and I think that overall, China does want the Yuan to appreciate (slowly and in a controlled way) because it's in their best interests as well. They need us to be happy with them too. The worst thing that can happen (from this perspective) is for the Fed is raise or even threaten to raise rates and I think the gov't is hoping with all it's might that the threat of inflation will slow and that the rate of growth will remain low so that the Fed can continue to stay on hold or perhaps reduce. I also think they can do a lot more the "hope".
How would I as a fundamental trader look to trade in the immediate term? Well, I think that any US numbers that are released in a $- way have the potential be strongly $-...more so then usual. I think that $+ numbers have the potential to reverse in a negative way after a $+ movement so watch for that too.
Watch for any indications that other CB's might be raising (I know, we do that aready but it's even more important now). Here's one more thing that I think will be incredibly important:
http://www.bloomberg.com/apps/news?p...d=a3b2DgV33TQQ
If that did happen there would be near equal appreciation in the GBP and EURO, with the GBP into the 9600's and the EURO in the 3200's.
*Watch for any indication that China is willing to widen the band in which it allows the Yuan to trade. It will signal immediate $ weakness for the near term, because any move to free up Yuan movement is a direct attempt to allow Yuan appreciation/$ depreciation*.