But first a little graph, just updated with current forex data, tracing the new decline vis-à-vis the dollar and the yen. Is it really surprising to see a resurgence in the so-called appetite for risk today in the wake of better-than-expected PMI figures in China this morning?
Yuan and yen against the dollar
Any adjustment goes through the Japanese currency!
The surprising part of this story is that the yuan's devaluation has occurred at a time of rising political pressures in the United States, with the filing of a bill by senators Schumer, Stabenow and Graham 16 March to clamp down on currency manipulation:
‘New legislation to crack down on unfair currency manipulation by countries like China.’
If this bill is approved, it will change the requirement to prove that a currency is being "manipulated" devise "fundamentally misaligned".
It defined as such, it requires the US Treasury to consult bilaterally with the country in question to resolve the problem.
However, if the currency is designated for "priority action", the bill provides for several stops of increasing severeness.
· The US government would be required to immediately consult with the IMP and recruit allies to persuade the country to eliminate the fundamental misalignment. It would also have to oppose any IMF governance changes benefiting a country thus designated (voting rights).
· After 90 days, the Commerce Department would be required to reflect exchange rate undervaluation in calculation of dumping margins, opening the way to more numerous and heavier sanctions than available today.
(An example is the Commerce Department's refusal yesterday to impose penalties on certain imports from China, given its inability (for the time being) to raise the yuan problem, although the IMF estimates that it is "substantially below its natural level". It is true that if the US Treasury refuses to characterise China's prohibition against the foreign convertibility of its currency and the arbitrary establishment of its fixing level while massively recycling its trade surplus in dollars as "manipulation", American manufacturers may be upset).
· After 360 days, the US would be required to request consultation with the country concerned regarding the WTO-consistency of its actions. The Treasury would have to ask the Fed to intervene on currency markets in co-ordination with the IMF and other central banks in order to correct the currency imbalance of the countries concerned.
It is hardly surprising to see the National Council of Textile Organisation fully embrace this move (‘NCTO applauds Levin for holding hearing on Chinese Currency Practices’).
As the organisation president stated:
"China's currency policy does nothing more than flood the markets of countries like the United States with artificially cheap imports creating dangerous trade deficits, surging overseas debt, massive job losses and the continuing erosion of U.S. manufacturing base and its high wage workforce. The United States manufacturing complex and U.S. economy cannot return to health while China keeps bleeding away our jobs and capital through its predatory actions."
And the Coalition for a Prosperous America upped the volume with its launch 13 July of National Currency Manipulation Call-In Day: all readers of this blog are asked to phone their two senators and congressmen to vote for this bill! Its site states:
‘ China and other countries continue to manipulate their currency giving them an unfair and illegal advantage against U.S. producers – most believe their currency is 25-40% undervalued. American Producers need to pressure the Administration to hold currency manipulators accountable.’
In this context of increasing aggressive rhetoric, the Chinese are hardly sitting still, as can be seen in this page from China Textile Magazine: Currency Misalignment": New Phrase Stokes Protectionism. I quote from Xu Weimin of Dongdu Group Inc:
"If RMB rises in value by 5%, I guess nearly half of the exporting companies will close the door. Everyone knows profit rate for a company is around 3% - 5%; most of companies are working hard to maintain 3% profit level. If Yuan appreciates by 1%, 20% of the exporting companies are placed at the balance point, a turning point either for profit or for loss. If Yuan goes up by 5%, half of the companies are closed!"
“Either "currency manipulation" or "currency misalignment", both of which are crowd-pullers or ruse to align China into their target, will stoke trade protectionism, and will do nothing good for the free trade philosophy in WTO. We urgently call for government to stabilize exchange rate, not to go too fast in currency reform at this time."
One of the most plausible explanation of the yuan's current weakness is the planned reallocation of part of the currency reserves, at least with respect to incoming reserves, toward currencies other than the US dollar. China said it bought government bonds in Japan (thus the yuan's strength) and Korea.
This is consistent with their promises to diversify the yuan's exchange-rate to a basket of other currencies and no longer limit themselves to the greenback(‘Basket Pegging’).
And the Chinese government in the beginning of August (as if by chance) also asked its commercial banks during a tripartite meeting with the State Council, the PBOC and CBRC to buy sovereign and foreign corporate bonds.
It is interesting to note that 30-year German bonds offered over 1% more than its US equivalent in December 2008, but now offers 0.88%... less, which just goes to show there are real international flows. (And that we also have the most deflationist central bank in the world, ...by the way!).
Have a good day.
Asset allocation biases and advised option strategies
· · The long-term macro biases remain downward on eurozone government yields and negative on risky assets (equities, European real estate, commodities) and a deflation/depression scenario, which will require much more effort by the ECB than a shame-faced QE.
· · Our short-term tactical biases: Our Bund target remains about 2.40-50% for the 10-year GGR, i.e. 130 December Bund and 2800-2900 on the Eurostoxx50.
The Bund call and put rations are working perfectly, given the decline in volatility and the end of the Bund's surge, and the Eurostoxx ladders are also working well. Check with me about strike price and maturities details.
Erwan Mahé - Asset allocation and option strategy
22, rue des Capucines - 75002 Paris
TEL : + 33 1 53 05 57 20