Yuan all around

Everyone is talking about it, parsing it, and (for now) praising it – but why?

By theoretically lifting the dollar peg (ever-so-slightly) the Chinese have pulled off a strategic political feat. First, they take pressure off themselves as world politicians try to find a scapegoat for their own economic mishandling. Second, they tap the breaks on their own credit induced real estate mania. Third, they give themselves a way out of increasing their treasury holdings.

And there you have it. By devaluing the yen, even a little bit, they open the window to slowing their treasury purchases. At the same time, since the Chinese don’t buy as many goods from the US as the US consumer buys from China, they don’t really risk any increase in domestic prices of US goods. On the other hand, the US consumer might face higher prices from Chinese goods, namely, everything. So the US trade deficit might get better from the fact that imports will go down, but I do not anticipate exports to China to rise substantially. Turns out that the Chinese don’t want to buy anything we produce – including our debt.

So what now? We remain short treasuries. The uptick in equities seems absurd since the cost of capital is rising, China is tapping their economic breaks, and US consumers will buy fewer goods in general (since Chinese manufacturing costs will rise). Not sure where the positive outlook for stocks is coming from, but alas, its there for now.

Last 5 posts by Yaron Sadan

• That sinking feeling - May 18th, 2012
• Opportunity on the horizon - May 18th, 2012
• Early can hurt - May 16th, 2012
• Diversify your Diversification - May 15th, 2012
• Losing Money Isn't a Crime - May 15th, 2012

No Comments

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a comment

You must be logged in to post a comment.