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The Thinking Turns Around So speedy
Obviously, China has the capacity to have a very important impact on where currencies are going, on account of 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 moves and dividing of resistances.
The simple fact is that the US needs to improve the trade imbalance with China. They are gettin too strong and we are getting too weak and that does not sit well for the world in general.The elections may have been a partial referandum on that-there is an understanding here that people are shedding jobs in part because of it (although the BLS claims that job growth is powerful ). The assignment at treasury of paulson is to improve the circumstance. How can the situation be improved?
Well, the democrats will probably be calling for tariffs. It is polictically hot and it makes them seem like they're doing something that the overall population wants. In a geo-political and market perspective it the worst thought. We need China as an allie and we need them as a market for our goods and services. Tariffs consistently make another country angry and I don't think anyone in power really wants to see tariffs. 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 war, the threat of tariffs is to an economic cold war because the threat of atomic weapons were to the cold war. The threat of the usage is a deterent that gets the other hand to come to the table and we do need for them to come to the table.
Ideally, we'd like to see China float it's currency in the free market, but that is not gonna happen anytime in the not too distant future. They are still means they're free-market in anything that matches them and unfree-market in anything that does not. The Yuan trades in a defined range that they control, so any movement happens very slowly. The Yuan can love, but only at a speed that they restrain.
We can weaken the $. This can happen in two primary ways: CB intervention and market movement. I'm not sure the CB wants to be in the company of doing so and that I tend to believe that overall, many economists and market participants believe that things are better done in the free market. The government has tremendous control over the market percieves reality. They put all of the numbers out and we have seen how numbers can be put out one method and revised entirely opposite on. They can definately exert control over the price of oil, that's the principal factor in restraining inflation. So there's a lot the gov't can do behind (and before ) the scenes to push the market toward $ devaluation.
My view? The growing trade problem does need to be addressed and I believe that is already in the process. It may not be completely fixed but maybe it's rate of growth can be slowed somewhat and I believe that overall, China does desire the Yuan to love (slowly and at a controlled manner ) because it's in their best interests as well. They need us to be pleased with them also. The worst thing that may happen (from this perspective) is to get the Fed is increase or even sabotage to increase rates and I believe the gov't is trusting with all it's might that the threat of inflation will slow and that the rate of expansion will stay low so that the Fed can continue to stay on hold or maybe decrease. I also believe that they can do a lot more the trust.
How do I as a fundamental trader seem to exchange in the immediate term? Well, I believe that any US numbers that are released in a $- way have the capacity be firmly $-. . .more so then customary. I think after a $ movement watch for that 25, that amounts have the capacity to reverse at a negative manner.
Watch for any indiions that additional CB's might be raising (I know, we do that aready but it's much more important today ). Here's one more thing that I think will probably be incredibly important:
If that did happen there will be close equal appreciation in the GBP and EURO, with the GBP into the 9600's and the EURO at the 3200's.
*Watch for any indiion that China is willing to widen the band where it enables the Yuan to exchange. It'll signal immediate $ weakness to the near term, because any move to free up movement that is Yuan is a direct effort to allow Yuan appreciation/$ depreciation.
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