Ralph Shell @ 1:42 PM, Thursday October 21 2010
Currencies have the potential for becoming a lively topic at this weekend's meeting in Seoul South Korea. An article this morning in Market Watch proclaimed:
"Currency war tops Asia Agenda for G-20..... Asian finance ministers and central bankers will use
this weekend’s meeting of the Group of 20 major economies in Seoul to
communicate the hardships they face from surging capital inflows and
appreciating currencies.
Concerns are mounting that if left unchecked, current trends are
creating a bubble that could suddenly burst in replay of the 1997 Asian
financial crisis that ended a boom-time for the region.
“We have a situation right now where pretty much every major
emerging-market economy is being subjected to a wall of money emanating
from the U.S.,” said Cantor Fitzgerald economist Uwe Parpart in Hong
Kong."
This concerns of emerging Asia seem beyond the horizon of US Treasury Secretary Geithner who in an interview with the WSJ today said he believed major currencies are "roughly in alignment now." This 'alignment' comes after the public musings of Fed President Bernanke, and echoed by his team, that additional monetary measures must be taken to stimulate the US economy and reduce the unemployment rate. The threat of QE II after the next FOMC meeting in early November has buried the USD, and sent currencies of emerging market sharply higher.
Additional liquidity, rumored to be 100B per month, will only compound problems. US business, with a couple trillion in undistributed profits, is looking off shore for investments. Confronting American business is some of the world's highest business taxes, and an administration continually adding encumbrances to expanded US activity. Many emerging countries are correct, fearing more USD's will create speculative bubbles, the consequence of QE II.
China, with the yuan pegged to the USD, has benefitted with the dollar's slide. This has further compounded the problem for exporters in other Asian countries including Japan. As the USD weakens, China's products become cheaper. Along the way, China started buying assets in the eurozone, which has helped firm to euro, making Chinese products more competitive moving into Europe.
Clearly many counties have an interest in the outcome of the G-20 Meetings. What is in the best interest of one country may hurt another, and action that might be helpful in the short term, would do harm over time.
Can we expect any surprises at the G-20 meetings? Generally the outcome of these meetings is scripted well in advance and the outcome is known, so a surprise in not likely. Baring an announcement that China is willing to let the yuan appreciate quickly, or Bernanke will abandon his dream of showering northeastern US constituents with money, do not expect any major surprise.
How do you trade these markets? If Geithner, seemingly a born again dollar bull, stays on center stage, and Bernanke, the USD's terminator is given the week end off, perhaps we will see the euro selling off again. Should the euro falter, let's try to buy the EUR/USD on a return to the 1.3730 level, risking about 100 pips on the trade. Target a return to the 1.40 handle.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.