yuan's appreciation against non-dollar currencies

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

It is a basic premise of technical analysis that the charts are more reliable than analysis of fundamentals. For one thing, in foreign exchange we do not have an enduring model of what determines the level. Sometimes it's one thing and sometimes it’s something else. For another, not only do politicians lie, but foreign exchange traders lie, too. They say they are looking at this factor or that factor when secretly they are looking at something else entirely. And in Foreign Exchange, any factor and every factor can be the critical piece. We would say, for example, that the threat of rising oil prices should be dollar-favorable insofar as rising oil is a menace to recovery that should create demand for safe-haven. But this is backwards - when oil rises, the dollar drops, at least in the last year or two. So which is it? Nobody knows, and we will find out only when traders tell us that oil is the top factor, which it’s not today. This can be infuriating and frustrating, but you have to admit it’s also endlessly engaging.

Of the two big political developments, we think the Europea-nAmerican "rift" on stimulus is not really very much to be concerned about. It’s not new, either. Europeans want the US to join them in "remaking capitalism," although it’s not clear what that means. The FT is running a giant series on the subject, all of which is very interesting and valuable but tends not to face the core issue: The basic premise of capitalism is that free markets deliver the optimum outcomes, as least with respect to prices, if with no consideration of social fairness. A society may wish for social fairness but risks unintended consequences and misallocation of resources if it tinkers with the price mechanism. This is a risk the US has been mostly unwilling to take, in part because of regrets over bad outcomes in the past.

It’s an enduring conundrum that won't get resolved at a G20 summit. Alas, the discussion of this topic in the US does not constitute a dialogue or a debate-the two sides have an ocean between them and no willingness to cross even partway. This is the Number One real failure of economics, but it's also a real failure of the political process in the US. They actually do this aspect of the political process better in Europe-this is quite an odd thing for an American economist to say, but it universally held as a certainty among European economists.

Something we can expect to get resolved is China’s decision-making on the yuan. As a big holder of US debt, the Chinese are aware of the power they wield. Premier Wen Jiabao said today that Chinese exports are being hurt by the yuan's appreciation against non-dollar currencies, which is a de facto appreciation of the yuan and a threat to exports (which fell 25.7% in Feb). China has no plans to change anything, though. Before we get hot and bothered about Chinese intervention or manipulation, consider that when a debtor owes $30, the creditor has the upper hand. When he owes $300 billion, the debtor has the upper hand. This is the sense in which it would be really stupid for the US to take any actions to devalue the us dollar exchange rate on purpose. We give it a better than 50-50 chance that US-China talks behind the scenes are contributing to the very good Chinese responses today. China is willing to consider another stimulus, said Wen Jiabao, something the US is calling for from everyone. It is willing to contribute more to the IMF emergency funds, another US request. All he wants in return is the US to "protect its credit rating, honor its words and ensure the safety of China's assets." And oh, yes, please stop pressuring us on the yuan. "No country can impose appreciation or depreciation pressure on the Chinese yuan," Wen said.

This is a wonderful outcome that is not being interpreted correctly, to our way of thinking. Everyone is noting that Wen Jiabao said he is "worried" but missing the rest of it, that he hopes the US does the right thing. China has extended a hand in trust. Let’s hope the Obama gang has enough sense to honor it and the Fed has enough skill to avoid the inflation that will constitute betrayal.

Pounds to US Dollars = 1.4120
Pounds to Euros = 1.1244
Euro to Pounds = 0.8895
Pounds to Australian Dollars = 2.1980

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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