Mighty Greenback? Not for much longer Iīd say. The Dollar was only instituted as the Worldīs reserve currency and measure of value because after two world wars America was the only developed nation left economically unscathed. This made sense because other nations were either ruined (Britain) or ruined and beaten (Japan and Germany), or not developed (China). Bretton Woods set the dollar as the reserve currency and at the same time restricted capital flows. Now money can go were ever it likes, the once warring Europeans now have joined economic forces and there are Mercedes on the streets of Beijing. Under such different circumstances having a national currency as the Worldīs reserve currency is like having a gold standard but only one country has the means to make gold chemically. Every time that country screws up, they screw it up for everyone else and everyone else gets a little bit p*ssed off. Twas always thus, but now because most other people are getting richer faster than Americans are we are getting to the stage where someone might start DOING something about it. Everybody who has an interest in the dollar should think about the following;
1. WDCW? What Does China Want should be the question everyone is asking. Before the crash it seemed simple; to sell lots of cheap stuff to foreigners and to invest the resulting money in a safe place. But dollar assets arenīt looking so safe, īsure you can have some of our gold, weīre producing the stuff like popcorn right now`. Yeah, and soon it will be worth the same. Donīt believe me? From the dragons mouth; China alarmed by US money printing Of course, as any dollar bull will point out, the last thing they want to do is start dumping and encourage a run whilst they still hold popc..., sorry, dollars. So theyīll do what you and I would do, try and sell on the highs and scale out. Any sign of dollar strength will get beaten down by the unwinding of their dollar positions. If Japan and other sovereign wealth funds do the same and thatīs more than a match for any remaining dollar bulls. Oh, and what about selling cheap stuff? Yes, the mighty American consumer is still there, but they are looking at a pile of debt bills rather than a pile of shopping, and one in ten are comparing the bills to their welfare check. So they are not the force they once were, and many countries are coming out of recession faster and stronger, so those might be a better bet, as might Chinese domestic consumers. Which leads me too…
2. I Yuan to Break Three. Ever looked at a 5 year chart for USDCNY? At the point where the Chinese floated their currency in mid 2005 it describes a perfect increasing downtrend from 8.1 to about 6.8 in mid 2008 when the Chinese put the brakes on. Now it ītrades` in the 6.82-6.84 range where presumably any large attempt to go short will mean you will have The Peoples Republic of China as your counterparty. Now any if there is the slightest breath of a rumour of a hint of a suspicion that they will allow some movement, any self respecting fund manager will start to think of putting a short on for when the dam breaks. Now, if any country can fight the market itīs China but governmentīs donīt have a good success rate here (ask the Bank of England; remember GBP in 1992?). And China may soon want a bit of currency appreciation. All those commodities arenīt getting any cheaper, all those new consumers might want to buy some imports soon, plus China would get more clout on the World stage. Chinese leaders also donīt have to worry about their next term…
3. Vote for me! Remember that American consumer, the one with no job and lots of debt? Heīs a voter as well, he is. Now that new chap on Pennsylvania Ave, I doubt he would be happy with just the one term, and unemployed guy isnīt likely to vote for him at the moment. So how tempting would it be to keep interest rates low, keep a little heat in the economy. Oh, and some more spending to keep things going, like a large healthcare plan, or ask the Democratic congress, they are bound to have some ideas. Oh, and keep the stimulus plans going. Hmmm…, unemployed debters might vote for me, Chinese guys donīt vote form, oh who to keep happy…
1. WDCW? What Does China Want should be the question everyone is asking. Before the crash it seemed simple; to sell lots of cheap stuff to foreigners and to invest the resulting money in a safe place. But dollar assets arenīt looking so safe, īsure you can have some of our gold, weīre producing the stuff like popcorn right now`. Yeah, and soon it will be worth the same. Donīt believe me? From the dragons mouth; China alarmed by US money printing Of course, as any dollar bull will point out, the last thing they want to do is start dumping and encourage a run whilst they still hold popc..., sorry, dollars. So theyīll do what you and I would do, try and sell on the highs and scale out. Any sign of dollar strength will get beaten down by the unwinding of their dollar positions. If Japan and other sovereign wealth funds do the same and thatīs more than a match for any remaining dollar bulls. Oh, and what about selling cheap stuff? Yes, the mighty American consumer is still there, but they are looking at a pile of debt bills rather than a pile of shopping, and one in ten are comparing the bills to their welfare check. So they are not the force they once were, and many countries are coming out of recession faster and stronger, so those might be a better bet, as might Chinese domestic consumers. Which leads me too…
2. I Yuan to Break Three. Ever looked at a 5 year chart for USDCNY? At the point where the Chinese floated their currency in mid 2005 it describes a perfect increasing downtrend from 8.1 to about 6.8 in mid 2008 when the Chinese put the brakes on. Now it ītrades` in the 6.82-6.84 range where presumably any large attempt to go short will mean you will have The Peoples Republic of China as your counterparty. Now any if there is the slightest breath of a rumour of a hint of a suspicion that they will allow some movement, any self respecting fund manager will start to think of putting a short on for when the dam breaks. Now, if any country can fight the market itīs China but governmentīs donīt have a good success rate here (ask the Bank of England; remember GBP in 1992?). And China may soon want a bit of currency appreciation. All those commodities arenīt getting any cheaper, all those new consumers might want to buy some imports soon, plus China would get more clout on the World stage. Chinese leaders also donīt have to worry about their next term…
3. Vote for me! Remember that American consumer, the one with no job and lots of debt? Heīs a voter as well, he is. Now that new chap on Pennsylvania Ave, I doubt he would be happy with just the one term, and unemployed guy isnīt likely to vote for him at the moment. So how tempting would it be to keep interest rates low, keep a little heat in the economy. Oh, and some more spending to keep things going, like a large healthcare plan, or ask the Democratic congress, they are bound to have some ideas. Oh, and keep the stimulus plans going. Hmmm…, unemployed debters might vote for me, Chinese guys donīt vote form, oh who to keep happy…
