17, September, 2010
Over the past 10 years, the deliberate undervaluation of the Yuan by Chinese authorities has always been the elephant in the room in FX markets. The Chinese economic juggernaut has been powered by exports of manufactured goods to the west made cheap by very low input costs. Quite rightly, China has been labelled the workshop of the world, and 8% average growth over the past thirty years has turned the underdeveloped middle kingdom to an economic powerhouse & the second largest economy in the world, behind the US.
America has long known China would overtake them eventually as the largest economy in the world, but they feel the Yuan undervaluation is giving the Chinese an unfair advantage. The cheap currency encourages Chinese exports and promotes outsourcing of jobs from the US to China, which in a time of sluggish economic growth and stubbornly high unemployment in the US, automatically makes it political hot potato.
Treasury Secretary Tim Geithner’s comments yesterday that the US would use “all the tools we have” to reverse the bloated trade deficit with China, including WTO rules on fair trade, should come as no surprise in content, only in strength, given the usual soft tone used in diplomatic circles. His comments come on the back of direct Japanese intervention earlier in the week aimed a curbing the strength on the Yen, and raises the prospect of a triangular trade dispute between the three largest economies in the world.
Sterling was, quite frankly, all over the place yesterday. Disappointing retail sales figures pushed the pound quickly lower in early trading, but as seems to be the way just now, we shook the negative news off quickly and resumed the march towards 1.57 against the USD. Improvements in risk sentiment has aided Sterling’s move, as has improving economic data in Europe and the successful Spanish bond auction yesterday. The Euro has been driven higher against the Dollar, lifting Sterling versus the USD as well and we now trade over 1.31 in EURUSD and 1.57 in GBPUSD.
Today, the eco calendar contains only some second tier eco data in Europe. In the US, the CPI and the Michigan consumer confidence are on the agenda. Recently, inflation data were no big issue for currency trading. Nevertheless, with markets focused on whether or not the fed should engage in more QE, a lower than expected figure could be slightly dollar negative.
Report by Alistair Cotton
The contents of this report are for information purposes only.
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