Is China going to allow its currency to rise dramatically against the Dollar?
Some people have been guessing in the past two weeks that this is in the works.
Might explain some of the strange things happening with stocks and bonds and gold and the universe.
The strange things, in a nutshell: Bonds are saying the world is mired in deflation and not likely to change soon, and US bonds in particular — where the short and medium and long term Treasury yields are low (showing no worries about inflation) and the inflation-protected Treasury bonds (called TIPS) are stagnant.
Bonds in short are saying things are bad and going to get worse.
But the US stock market has been rallying since March, and refusing to go down despite a world of traders expecting it to do so. As if things were much improved and going to get better.
The dollar is crashing thru what some had hoped as late as a week ago was short-medium term support. And gold is rocketing, thru the $1000/oz psych level. These (like the bonds) would seem to say things are cruising for a bruising. So why are stocks rocketing?
And why are people buying US bonds (driving those yioelds down) if there is a panic underway with the dollar (which when devalued hurts bonds denominated in dollars)?
A scenario which makes sense of these apparent broad contradictions is a sudden revaluation of the Chinese currency (some call it Yuan, some REmimbi) against the dollar.
The chinese for a long time thru their Great Industrialization these past years held the Yuan fixed against the dollar. This Peg was relaxed a bit a few years ago but the chinese government still holds the Yuan low vs dollar with stern intent — by buying dollar-denominated bonds with the great influx of cash (in many currencies) it enjoys as the world’s sweatshop manufacturer of choice.
But at the same time, of course, Peking has been moaning and groaning as first Bush-Cheney and now Obama pursue policies that have broken all prior restraints on the US national debt. For the future here is clear — inflation. Which devalues that trillion in Treasuries Peking holds.
So the chinese are floating down river with a leg in the Buy Dollars boat and a leg in the Sell Dollars boat. (They want the Yuan low against the dollar to continue to fertizlize their industirial growth — but they see and fear the inflationary future of their dollar denominated holdings.)
If Peking does allow the Yuan to rise dramatically vs the dollar, gold would likely go to the moon, Chinese stocks in general would suffer, the dollar would tumble against all the major currencies, and everything one buys with dollars (eg oil, US Treasuries) would cost more merely as a matter of exchange, regardless of fundamentals.
It might trip off, sooner than anticipated, the Great Inflation / Dollar Devaluation that everyone sees on the horizon as the only way out of the great debt hole Uncle Sam has dug for himself since the 9/11 attacks.
The cure always begets another disease. Greenspan took us down to super low interest rates to try to keep things going post Tech Bubble Pop and 9/11.
Those low rates begat the credit and real estate bubbles.
Their popping begat the meltdown of the New York-London-based high-tech global financial system.
That has begotten this Depression, to treat which Washington a year ago went banannas with new debt.
Which leaves the Chinese with a foot in each of two boats, which the tides of history are pushing apart. They’ve been jawboning about the Dollar and reducing their dollar assets for several years now.
Perhaps the moment for the big move — allowing their currency to float — ie, CEASING to buy tons of dollars/dollars assets to keep their currency down — is upon us.
Here’s the last 18 months of the dollar. The DXY index.
Bottoming circa 78 or ready to revisit that 72 level??
ed says:
A week later …
Dollar has sunk indeed from that 78 level on the DXY:
And news this morning that money is fleeing dollar assets at a much faster rate than expected (something akin to the steady shock about Greenland) has gold shooting to $1020:
QUOTE
Dollar Down After Capital Outflow Data
The dollar was lower against the euro and yen Wednesday [9/16] after U.S. Treasury data showed a sharp increase in net capital outflow from the United States in July.
The net capital outflow from the United States increased to $97.5 billion in July from a revised outflow of $56.8 billion in June, the Treasury Department said in its Treasury International Capital (TICS) flows report.
The department originally reported an outflow of $31.2 billion in June.
The United States posted a trade deficit of $31.96 billion in July.
“The headline number certainly paints a bit of a dark picture with regard to overall demand for U.S. assets,” said Omer Esiner, a senior market analyst at Travelex Global Business Payments in Washington.
END QUOTE
September 16th, 2009 at 10:11 am
ed says:
Aha. Here’s a mainstream story — on Marketwatch.com — reporting that the Chinese have now signalled they intend to resume revaluing the Yuan (ie letting it rise) against the dollar:
http://www.marketwatch.com/story/chinas-yuan-may-resume-rise-but-more-slowly-2009-09-17
September 18th, 2009 at 9:21 am