It’s a problem that has been talked about before — inside China it’s what the yuan does against the dollar that seems to matter. Which is awkward because China is quite keen on people concentrating on what it does versus a basket of currencies.
The potential consequence of that USD fixation is that if the $/CNY rate goes higher then there is a risk that capital flight picks back up again in tandem with expectations of further depreciation, no matter what the RMB is doing against that currency basket.
In the words of Goldman’s Robin Brooks and team:
China is pursuing a shift in its currency management, towards a trade-weighted exchange rate and away from the bilateral exchange rate versus the Dollar. That shift makes sense conceptually, given that monetary policy normalization in the US is likely to push the Dollar up, so that some weakening of the RMB versus the greenback can certainly be justified given China’s cyclical position. But the shift to a trade-weighted exchange rate has a weak link, which is that the main signal for households and businesses within China remains the bilateral exchange rate versus the Dollar.
This post will be made up of two pieces. The first will try to explain why JPY continues to defy Japan’s negative rate-led demand for currency weakness. The second will add words to this picture from HSBC which proclaims a break in the (so-called, he adds hastily) currency wars, predicated mostly on said JPY strength:
At last sighting JPY was hovering at about Y108. That’s not good if you are the BoJ’s Kuroda or the overarching Abe, particularly because FX strength can beget more FX strength. The question is why did the yen start this slide: Read more
An important question for anyone who thinks the euro area needs to keep its currency weak to grab foreign demand. Or who thinks that’s what the ECB thinks, anyway.
Which leads us, naturally, to a partial Fed transcript from August 1985: Read more
You’ll certainly be… something.
According to BofAML’s monthly asking questions of global fund managers extravaganza anyway. Its conclusion is the new “pain trade” is “short dollar”:
Nasdaq in the 1990s, Dow in the 1920s, silver and gold in the late 1970s, USDRUB, Bitcoin and oil more recently…
An example of spurious pattern searching or prescient warnings of a dollar bubble?
*shrug* We dunno.
But here’s HSBC’s position, via charts first and then words: Read more
From RBS’s Alberto Gallo and team:
Gallo is, selectively, very bearish (not on India though, natch) for the obvious reasons: Read more
From Morgan Stanley’s Asia Pacific team (do click to enlarge):
The bigger the bubble the bigger the debt, but more on that near the bottom. Read more
Fair enough if you want to talk about QE and devaluation but the recently released FOMC minutes really don’t seem to be the place to start building your argument for a Fed jumping into the currency wars.
Bringing us the opposite view, here’s some Bloomberg: Read more
Fool me once… with a surprise easing move somewhat forced upon you due to a somehow ‘unspoken’ currency war… shame on, er, you. Obviously.
The argument being that whatever liberties central banks take now with surprise monetary policy, moves will be paid for with a lack of credibility in the future. Read more
Well, here’s one answer to a question we’d been wondering about since last week, when the ECB lowered the deposit rate from 0.25 per cent to zero.
We were curious to know whether some EUR-denominated investors would switch into USD short-term markets in a search for yield. Read more
One reserve currency to rule them all.
But does it need to be this way? Or is it indeed possible to have two, or even several such currencies? Or to get straight to the heart of it: can the euro or Chinese yuan ever have the status of the US dollar? Read more
From ICAP Research’s Chris Clark, a chart that shows the net change in the EURUSD basis swap rate in the past week Friday, February 24 – Friday, March 2:
Standard Chartered’s Priyanka Kishor has spotted an interesting new development in correlations.
As has been well documented, since the 2008 crisis, ‘risk off‘ market temperament has strongly coincided with dollar inflows. In short, ‘risk-off’ has equalled ‘dollar positive’. Read more
A chart from SocGen’s latest Hedge Fund Watch showing that as of last week, hedge funds were short the Euro against the dollar “like never before”…
Exhibit a) the euro versus the dollar:
From a Europe mired in an unresolved sovereign debt crisis and in the midst of trying to recapitalise its banking sector, all this positive US economic data is frankly just irritating.
In fact it’s been so good in terms of positive employment and manufacturing metrics that the Rates & Currencies team at BofAML published a piece entitled “The USA a safe haven again” with this line in it: Read more
Something is happening in China.
That’s the ominous title of an FX note posted by George Saravelos of Deutsche Bank on Friday morning. Read more
At first glance, it looks like the market has become bored with the US debt ceiling game of chicken, with underlying hopes for a busy and positive week of corporate earnings from global companies helping to stabilise equity benchmarks and support commodities, the FT reports. In the US government bond market, the sale of $35bn in new two-year notes attracted solid demand, with no sign of jitters about the market possibly losing its triple A status should Congress fail to increase the $14,300 debt ceiling by the August 2 deadline set by the Treasury. The FTSE All World is up 0.3 per cent following a solid session in Asia. The S&P 500 on Wall Street has closed 0.4 per cent lower after the FTSE Eurofirst 300 dropped 0.3 per cent. Results from 3M, BP and UBS challenge the otherwise upbeat narrative and counteract well-received figures from the likes of Ford and Deutsche Bank. Copper is rallying 1.6 per cent to $4.47 a pound and Brent crude is up 0.4 per cent to $118.29 a barrel as traders add to growth-focused positions. Early selling of gold has reversed with the precious metal up 0.3 per cent at $1,619 an ounce.
The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn, reports the FT. More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years. That marks a departure from previous years, when the central bank reserve managers have said the dollar would retain its status as the sole reserve currency. UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets at its annual seminar for sovereign institutions last week. The results were not weighted for assets under management. The results are the latest sign of dissatisfaction with the dollar as a reserve currency, amid concerns over the US government’s inability to rein in spending and the Federal Reserve’s huge expansion of its balance sheet.
The World Bank expects the US dollar to lose its solitary dominance in the global economy by 2025, as the euro and the renminbi establish themselves on an equal footing in a new “multi-currency” monetary system, the FT reports. The shift will be driven by the growth of emerging market economies, with six countries – Brazil, China, India, Indonesia, Russia and South Korea – accounting for more than half of global growth in 14 years, the Bank said.
To quote (again) a pint-sized musical firecracker from Minneapolis, this is what it sounds like when doves cry:
The global growth trade remains the favoured strategy, initially pushing many commodity prices and core bond yields higher, but leaving stocks struggling for gains as higher input costs raise concerns over corporate margins, reports the FT’s global market overview. Those inflation concerns were most clearly expressed in the precious metals sphere, where silver struck another 31-year high of $41.93 an ounce and gold touched a record $1,476 an ounce early in the session before some profit taking kicked in. Wall Street is firmer, with the S&P 500 up 0.3 per cent, helped by Level 3’s well-received $3bn bid for Global Crossing. London’s FTSE 100 is up 0.1 per cent as miners ride the commodity rally and banks show relief following the publication of the Vickers report on the UK banking system. Brent oil, which has been more closely correlated to Mideast supply concerns of late, is down 0.6 per cent to $125.86 a barrel, while US-based West Texas Intermediate is off 0.6 per cent to $112.15. The dollar index sits just above 15-month lows.
Global stocks are challenging cyclical highs as the warm glow from Friday’s strong US jobs data challenge the chill from Middle East turmoil, Japan’s earthquake travails and eurozone fiscal woes, reports the FT’s global market overview. The FTSE All-World equity index was up 0.3 per cent at 228.5, just shy of February’s post-credit crunch closing high of 228.9. US equities struggled for direction, with the S&P 500 adding less than 0.1 per cent to 1,333.25 by mid-session on Wall Street. The Dow Jones Industrial Average rose 0.2 per cent to 12,395.26, while the Nasdaq Composite put on 0.1 per cent to 2,791.12. The Australian dollar rose to a high of $1.0416 against the US dollar, its highest since it was allowed to float freely in 1982, and hit an 11-month peak of Y87.67 against the yen. The dollar also hit a five-month low of $1.4268 against the euro and pulled back from Friday’s six-month peak of Y84.72 against the yen to stand down 0.2 per cent at Y83.90 by midday in New York. Oil prices rose above $120 a barrel for the first time since mid-2008 on Monday as supply disruption in Gabon, compounded continuing losses from Libya.
Wall Street closed down 2 per cent and pushed the S&P 500 into negative territory for the year, reports the FT’s global market overview. The Japanese yen hit a record postwar high against the dollar as currency traders bet on repatriation flows, FT Alphaville reports. Risk aversion flared after the European Union’s energy chief said the Japan nuclear reactor situation was “out of control”, triggering renewed fears over the world’s third-biggest economy. Traders quickly realised that the statement by Guenther Oettinger was not predicated on any new information relating to the conditions at the stricken Fukushima plant. That helped send European stocks down for the sixth straight day, and as the selling accelerated in New York, the S&P’s Vix volatility index jumped 19 per cent to 29, its highest since July. Oil lost a chunk of its gains, while key US Treasury yields fell to levels last seen in December. The Swiss franc had risen 1 per cent versus the dollar and was up nearly 2 per cent against the euro as traders again scrambled for perceived havens.
“This isn’t a flight to quality, it’s a flight from disaster.“ [Via Bloomberg]
That, from Colin Embree from Bank of Nova Scotia Asia, sums up movements on Tuesday morning. Read more
Some thoughts from emerging market specialist, Ashmore…
… On Chinese president Hu Jintao’s visit to America: Read more
A report Wednesday morning from Reuters, which spots an article in a Chinese-language newspaper:
China will let the yuan rise about 5 percent against the dollar in 2011 to combat inflation, an official newspaper said on Wednesday, while a former central bank adviser said the country needs to free up the currency. …
A pullback in yields and the dollar is giving a lift to risky assets, though an eye remains toward the eurozone fiscal saga and the run-up in bond yields that have been crimping seasonal bullishness, the FT reports. The FTSE All-World equity index is flat, following a soft showing in Asia, but the S&P 500 index has reached a new 26-month high at 1,243, up 0.6 per cent on the session. An eagerly anticipated auction of Spanish debt has provided ammunition for stabilisation of the euro. Madrid managed to secure €2.4bn of funding from the sale of 10- and 15-year bonds. There was decent demand, though only after yields were pushed sharply higher to reflect investors’ concerns about the country’s budget difficulties. But the euro has managed to climb to flat, helped by a strong German manufacturing survey. News that the European Central Bank will almost double its capital to €10.76bn in order to help it combat market volatility also provided support.
The big story on the trade balance figures released this morning is that US exports climbed to a two-year high in October on the back of a $4.9bn monthly boost over September. Imports declined by $0.9bn.
Trade in services was mostly unchanged, but nearly every category of goods showed improvement. The trade balance figures tend to jump around a bit, so it’s dangerous to extrapolate anything from just one month’s reading, but the balance appears to have broken away from its downward trend: Read more