One of the Most Important Articles You Will See

The Day BB Published the News that China Began It's Purchase of the USA (and much of the rest of the world)

http://bloomberg.com/apps/news?pid=2...YtE&refer=asia

Read this. I'm not gonna post any comments right now, but they'll be plenty to come in the future! The implications are emmense, far-reaching and world-changing. If you're a bit older, you'll remember in the early and mid 80's when we had a trade deficit with Japan and they started spending some of that money. The peak of the outrage came when they bought Pebble Links Golf Club. Much, much more on this later.

Who want to invest in US when one can easily make 60% yearly return by investing in China stocks. China Banks are flooded with liquidity and no where out. So this will be USD- I think.

Why?
Diversification

Which movie outfit did they buy? MGM? Paramount? And then some music recording companies as well?

This is why some are warning about the Yuan appreciation: "Be careful of what you wish for"
1) Goods you buy in Walmart will rise as most are manufactured in China
2) China will then have more money to buy USD and then more money to buy foreign companies and properties.

There has been some very important fundamental info from Zhou of the PBOC-

They plan to diversify their foreign reserves-this caused an enormous $- movement as traders initially took that as a signal they would diversify out of $'s...

Then he backed off his statement a bit and said theor policy is little changed from before...

The point here is that whatever China does has profound fundamental effects...which could make trading very very tricky....his words nullified all the $+ info today in less then 30 minutes.

http://bloomberg.com/apps/news?pid=2...eWQ&refer=asia

tell me about it...

http://www.bloomberg.com/apps/news?p...currency_rates

Thats what your refering to i take it... to me thats expected why keep all your eggs in 1 basket...

The bottom line is that if the PBOC starts making unannounced statements...that will make trading very difficult. Obviously, when the PBOC talks, the markets listen intensely...

I have some swamp land in Florida if their interested

<HR style="COLOR: #d1d1e1" SIZE=1> <!-- / icon and title --><!-- message -->

It just goes to show how the fundamentals drive the markets...any word from china indicating they plan to "diversify" means they will sell their $'s.

Since they have so much-1 trillion at least-they obviously have tremdous power to move the market. On the other hand-they don't want to cause wholesale panic, because it makes their reserves that less valuable.

This does however fit into what Treasury sec Paulson would like to see-he's been calling for Yuan appreciation in the free market-one way for that to happen is by making the $ less valuable...not sure if this is exactly what Paulson had in mind, but the net effect is the same.

The article also says there will be more foreign investment from china-which probably means a tremendous amount of M&A activity...time to get some long options in Goldman, Merryl, etc?

As with all fundamentals, the effects usually fade very quickly...now might be a good time to think about some short EURO or GBP positions...small at first...increasing if you get profitable...

So the report somewhat $- meaning 1.91-1.92 in GBP/USD is on the cards b4 the end of this month?.....

Initially, it was very $-...hard to say how long the effect will last...it may depend on further statements...a short position should be entered ONLY with a very small, speculative trade in mind...and don't trade yet if ur not getting the latest updates as they may occur...

The previous resistance in the GBP was in the 9110-20 area, but of course that could break if further PBOC statements indicate $-...

I just came across this on FXCMTR.com...What do you guys think about this one?

EURUSD - The ratio of longs to shorts is -2.88 as 74.2% of the currently open orders are short. Long orders are 26.5% lower than yesterday and 24.2% weaker since last week. Short orders are 34.5% higher than yesterday and 8.2% stronger since last week. Open interest is 10.8% stronger than yesterday and 2.2% below its monthly average. Looking ahead, the SSI signals EURUSD strength.

Central bank diversification talk usually leads to very short term currency movements. I recall similar announcements by Venezuela, Russia, China and middle eastern banks a while ago that sent the Euro up but this was very short lived.

It is a contrarian report although the short orders are higher than the long orders in EURUSD you would notice that the SSI failed to jibe with the report, so in my own opinion follow the SSI signals (long EUROUSD) and not the report......

Remember it is a contrarian statistics (i have mentioned this a week or two ago)..

Whenever there are MORE LONG than SHORT, the pair will actually move down. And if more SHORT than LONG, the pair will go LONG.

So saying that there are more short eurusd, the pair will move up instead as it did.

There goes the sleeping dragon. It'll definitely awake soon.

The Thinking Turns Around So Fast


Obviously, China has the potential to have a very important effect on where surrencies 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. 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. There was an article in BB yesterday that pertained to this. If I can find it, I'll paste it. An analyist from Goldman indicated that the band that China allows the Yuan to trade in might be widened and he felt that the Yuan would appreciate by over 3% in the near future (3 months) if this happens. 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 do exactly this*.