Looming Currency Devaluations

Rapid deterioration in trade-dependent nations — Japan, China, and Germany — suggest that these countries will have to resort to competitive devaluations to boost economic growth. The yen and Yuan have sidestepped the Euro’s rough beating in recent months, but all three look no match for the severe export thrashing currently underway.

The US Treasury Secretary wants China to revalue its currency in recognition of US manufacturing weakness. Current economic forces actually call for currency depreciation. China’s exports are down by 20% since August 2008. Imports, a key part component to the export supply chain, have contracted even more than exports in a case of industry destocking. If that changes and China’s trade balance turns negative, the US Treasury Secretary will be faced with a stark choice. Either the Yuan depreciates or the People’s Bank of China must sell US Treasury holdings to support the currency.

Exports in Japan fell 45% in January and domestic demand is contracting. The yen rose from 110 to the dollar to 87 in the second half of 2008 as the yen carry trade, yen loans invested abroad, unwound. Now sitting at 98 to the dollar, the yen still looks very pricy. The increase in Japan’s exports over the decade ending 1997, “accounts for a massive 48% of the increase in total supply (GDP plus imports) over the same period,” according to Lombard Street Research. Sell the yen.

Germany’s situation is perhaps worse than Japan’s. If it wasn’t for exports, Germany’s GDP over the past decade might have been falling, according to Lombard Street Research. Now that exports haven fallen heavily over the past three months, it is, in recession that is. Throw in a banking crisis in Switzerland and Austria where billions in loans to emerging Europe are under threat and a weaker Euro looks like the only remedy for the sick man of Europe.

Comments

[k9s-4-k8:]

Who said anything about the US Sec Trea devaluing the Yuan? Its pegged to the dollar by the Chinese. I think everyone else knows the US can only jawbone it with the Chinese as many in Congress already have, and Geithner did during his confirmation hearing. Another thing countries can do as according to International trade rules is label another country a currency manipulator, but you won't see that happen. In fact, you aren't going to hear the administration speak again about China needing to revalue the Yuan.


On Feb 27 12:14 PM boats.j wrote:

> The Author wrote:
>
> "...China’s trade balance turns negative, the US Treasury Secretary
> will be faced with a stark choice. Either the Yuan depreciates or
> the People’s Bank of China must sell US Treasury holdings to support
> the currency."
>
> How does the US Sec Treas devalue the Yuan? He doesn't! He Can't!
> So, what smoke are you blowing here?

Feb 27 12:48 PM

[boats.j:]

Read it again. Perhaps I found more nuance in the quoted statement than is really there.... He goes from Sec treas stark choice to two choices...

Thanks


On Feb 27 12:48 PM k9s-4-k8 wrote:

> Who said anything about the US Sec Trea devaluing the Yuan? Its pegged
> to the dollar by the Chinese. I think everyone else knows the US
> can only jawbone it with the Chinese as many in Congress already
> have, and Geithner did during his confirmation hearing. Another thing
> countries can do as according to International trade rules is label
> another country a currency manipulator, but you won't see that happen.
> In fact, you aren't going to hear the administration speak again
> about China needing to revalue the Yuan.

Feb 27 12:55 PM

[Chris B:]

Forget currency trades! The writing is on the wall that Japan, Europe, and China will have a lot fewer dollars with which to buy the coming tsunami of treasuries.

Maybe I should double-down on TBT. I'm already up 14% in < 2 mos.

Feb 27 03:05 PM

[If U Say So:]

So, you're saying to forget currency trades and then in the very next and only sentence state that other countries won't have money to buy treasuries. Why do these two statements seem like they should come from two different people?


On Feb 27 03:05 PM Chris B wrote:

> Forget currency trades! The writing is on the wall that Japan, Europe,
> and China will have a lot fewer dollars with which to buy the coming
> tsunami of treasuries.
>
> Maybe I should double-down on TBT. I'm already up 14% in < 2 mos.

Feb 27 09:46 PM

[X-15:]

China,Japan, two large holders of US$, under pressure to support failing export market SELL Dollars in support of thier own economy creates problem for US Treasury.JUST at a time Treasury needs an increase in buyers for massive debt overhang. It is as Faber, Rogers say, Treasury is boxed in. The threat is an auction where the participants do not have the resources nor inclination to buy.
What then? Does the Treasury buy its own debt...?

Is Irag going to help ..
Russia?
Argentina?
Iceland?
India?
The Chinese understand the implication. It is this--will the Chinese help US financial shennanigans to the detriment of its' own populace?

Feb 28 12:47 AM

[overtaxed42...:]

Oh c'mon people, where's the ol' Obama spirit? Spend spend spend some more, Congress will back him all the way cause when the whole house caves in as it is in the process of doing, Frank and Dodd and Pelosi will all point at him and say "it's his fault, he made us all vote this overspending policy into law, we had no idea this would happen." If that doesn't ease the tension then they'll start looking outside the US at the aforementioned countries. You know, the ones that have so far been there to prop up this scam economics policy the US has ran us all into the ground with.
I can't believe these bankers now want to go even further than manipulating our own currency with interest rates and supply. Since that failed as always does with fiat currency, now they want to revalue the currencies of other countries? The gall of them to even suggest that another country should chop off their arm to save the snake that bites them. Reality will set in when China just dumps every last dollar onto the world at once, ridding themselves of the problem it has become, trying to save some of the capital it earned before the dollar turns to nothing more than toilet paper. Luckily for the US that won't happen. I am sure they'll dump some, but they probably won't have anything more to do with treasury bills. Who would when your return is negative?

Feb 28 03:45 AM

[Dave Wrixon:]

Yes, but what are you going to trade? Clearly nobody is going to buy your cars. Never mind worrying about Germany and Japan, soon most of your cars will be coming from the BRIC countries.

Yes, America needs to think very hard about exporting. Reliance on branding and advertisement needs to be reduced. The American reputation for goods and services has to be rebuilt. It will probably take decades but buzz words need to be quality and cost. If America is going to survive on trade they probably also need to focus on tangibles. Trying to rebuild a reputation in financial services is going to be long hard slog.


On Feb 27 11:52 AM doubleguns wrote:

> With consumer purchases falling over a clift seems we might be a
> trade dependent nation too very soon if not already.

Feb 28 06:01 AM

[James Lewis:]

X-15 if other countires do not step up and buy Treasuries, then the Fed will expand their balance sheet and buy them. This is the modern form of printing of money.

Please everyone note that countries around the world need to be holding a developed currency backed by large debt market in order to be involved in world trade. Therefore you are not going to see the major currencies Euro, USD and Yen all drop in tandem and all money repatritaed into local currency. This could only happen if globalistation contracted back to where it was 100 years ago.

So one of the currencies needs to move up.
Central Banks are funneling money to Gold to spread their holdings.
But you can not trade using gold so its really only a hedge.

Everyone keep son talking about how much Treasuries are coming on the market and the deficits the USA has but it is all relative to their huge GNP/GDP. And people always refer to the 30 trillion they owe on their balance sheet, but never consider the value of their assets (people, technology, financial colonial power, military network, domestic infrastructure). This is worth far far far in excess of 30 trillion, therefore assets exceed liabilities. And lets be fair there is certainly no cash flow problem as long as they control the system (which they do)

I think Europe is in far worse shape so yo'll get a situation that money flows out of Euros and supports the dollar. I also question whether it would be wise for the Europeans to sell some of their gold holdings a these levels to shore up their financial situation. This could offer an interesting counter-intuitive move.

Feb 28 06:22 AM

[know nothing:]

Maybe we need to change the bankruptcy laws, so people can file every 2 years. Then lets change the the way we determine a person risk in the credit rating agency's system. That way people can have a clean slate sooner, So then we can all borrow more money, and keep this economy going. That's just wrong! and That's scary!

Feb 28 08:38 AM

[auto44:]

What do we have to trade. Our once mighty industrial nation is a shadow of it's self. The usual perpertrators aka congress has overseen this whole mess and it's only the beginning.


On Feb 27 11:52 AM doubleguns wrote:

> With consumer purchases falling over a clift seems we might be a
> trade dependent nation too very soon if not already.

Feb 28 09:51 AM

[arlin:]

Anyone who has not read the the Creature from Jeykell Island,by G Edward Griffin should do so: Today over at financialsense.com there is an interview with Griffin,always enlightening.

Feb 28 10:18 AM

[If U Say So:]

On Feb 28 08:38 AM know nothing wrote:

> Maybe we need to change the bankruptcy laws, so people can file every
> 2 years. Then lets change the the way we determine a person risk
> in the credit rating agency's system. That way people can have a
> clean slate sooner, So then we can all borrow more money, and keep
> this economy going. That's just wrong! and That's scary!

But it would make for an entertaining horror movie!

Feb 28 11:21 AM

[notsosmart:]

look who is complaining.the folks that created this mess with phony AAA worthless paper & fooled the world.but lets not play the blame game-LOL.its all ponzi & you got what you deserved.this is not investing,its just gambling.most of the time you lose.

Feb 28 12:58 PM

[BigOlDave:]

Chris,

Betting against the Yen (YCS) is working as well as a bet that 20-yr T-bills will fall in price/rise in yield (TBT). I've made great $$$ as the Yen unwound (FXY), then moved into/out of ag futures (DBA), then gold (ABX). I think Newmont (NEM) is a better gold play, since it is unhedged.

Those were my winning trades I don't "buy-and-hold". I've got a lot of losers too: zombies that might come to life, but aren't worth paying a brokerage fee to shake the decay out of my portfolio.

Who has potential winners (besides TBT) in the next 12 months?

Dave






On Feb 27 03:05 PM Chris B wrote:

> Forget currency trades! The writing is on the wall that Japan, Europe,
> and China will have a lot fewer dollars with which to buy the coming
> tsunami of treasuries.
>
> Maybe I should double-down on TBT. I'm already up 14% in < 2 mos.

Feb 28 01:16 PM

[261133:]

Germany is already preparing the sale of about 50% of their gold in order to pay for the huge stimulus package. Other EU-Nations are probably following . They just want to make sure that the gold price is as high as possible before they dump hundreds of tons into the market.



On Feb 28 06:22 AM James Lewis wrote:

> X-15 if other countires do not step up and buy Treasuries, then the
> Fed will expand their balance sheet and buy them. This is the modern
> form of printing of money.
>
> Please everyone note that countries around the world need to be holding
> a developed currency backed by large debt market in order to be involved
> in world trade. Therefore you are not going to see the major currencies
> Euro, USD and Yen all drop in tandem and all money repatritaed into
> local currency. This could only happen if globalistation contracted
> back to where it was 100 years ago.
>
> So one of the currencies needs to move up.
> Central Banks are funneling money to Gold to spread their holdings.
>
> But you can not trade using gold so its really only a hedge.
>
> Everyone keep son talking about how much Treasuries are coming on
> the market and the deficits the USA has but it is all relative to
> their huge GNP/GDP. And people always refer to the 30 trillion they
> owe on their balance sheet, but never consider the value of their
> assets (people, technology, financial colonial power, military network,
> domestic infrastructure). This is worth far far far in excess of
> 30 trillion, therefore assets exceed liabilities. And lets be fair
> there is certainly no cash flow problem as long as they control the
> system (which they do)
>
> I think Europe is in far worse shape so yo'll get a situation that
> money flows out of Euros and supports the dollar. I also question
> whether it would be wise for the Europeans to sell some of their
> gold holdings a these levels to shore up their financial situation.
> This could offer an interesting counter-intuitive move.

Feb 28 01:19 PM

[Dave Wrixon:]

I'll have a pint of whatever he is on!

On Feb 28 06:22 AM James Lewis wrote:

> X-15 if other countires do not step up and buy Treasuries, then the
> Fed will expand their balance sheet and buy them. This is the modern
> form of printing of money.
>
> Please everyone note that countries around the world need to be holding
> a developed currency backed by large debt market in order to be involved
> in world trade. Therefore you are not going to see the major currencies
> Euro, USD and Yen all drop in tandem and all money repatritaed into
> local currency. This could only happen if globalistation contracted
> back to where it was 100 years ago.
>
> So one of the currencies needs to move up.
> Central Banks are funneling money to Gold to spread their holdings.
>
> But you can not trade using gold so its really only a hedge.
>
> Everyone keep son talking about how much Treasuries are coming on
> the market and the deficits the USA has but it is all relative to
> their huge GNP/GDP. And people always refer to the 30 trillion they
> owe on their balance sheet, but never consider the value of their
> assets (people, technology, financial colonial power, military network,
> domestic infrastructure). This is worth far far far in excess of
> 30 trillion, therefore assets exceed liabilities. And lets be fair
> there is certainly no cash flow problem as long as they control the
> system (which they do)
>
> I think Europe is in far worse shape so yo'll get a situation that
> money flows out of Euros and supports the dollar. I also question
> whether it would be wise for the Europeans to sell some of their
> gold holdings a these levels to shore up their financial situation.
> This could offer an interesting counter-intuitive move.

Feb 28 01:59 PM

[Mad Hedge F...:]

PmB $$There is a lot of talk today about the recent weakness of the yen, which along with gold, became the focus of the “short America” trade. The Japanese currency has backed off from its ¥88 peak a month ago to ¥98, breaking several key technical levels, and seems poised to go lower. Other than flight to safety, there was never a reason to go long of this currency. The trade and current account surpluses are in free fall, as Toyotas, Lexus’s, Hondas, and Infinitis pile up on west coast docks. The economy is even sicker than ours, and with zero interest rates for the past 14 years, this certainly is nobody’s yield play. Clearly the yen became the global carry trade’s cheap date, and the cross has emerged as a highly sensitive indicator of global risk taking appetite. Could this bout of weakness be a mustard seed of economic recovery, a light at the end of the tunnel? Watch the Proshares Ultra Short Yen ETF (YCS), which gives you a 200% short play, and is up 25% in a month.

Feb 28 03:11 PM

[Stephen Str...:]

I expect China will get value for their USD when they are ready. Perhaps a takeover of Taiwan to go with their USD "dumping". Military spending has been going up with GDP at 10% pa - it soon adds up. Orbital "Space" missions and shooting satellites up in space. A massive army.

After all, China and the Chinese people believe they own huge swathes of territory that no one else thinks is theirs, and the mineral rights which go along with it (the South China Sea is another example). It's always interesting to see locally produced maps.

www.upiasia.com/Politi.../
&quot;Although most of its land border disputes have been resolved [ie with 12 of its neighbours], China still has a number of unresolved sea border issues. The question is whether China will take the same approach to settling these disputes, which involve huge potential resources including fish, oil and gas.&quot;

Japan has long seen China as the sleeping giant.

And one last element of this exotic theory - the huge male/female population imbalance resulting from the one boy (I mean child) per family policy. What exactly are all these single men going to do? (Apart from fight a big war, perhaps with India where they still have a land border dispute, or the US/Japan where they have a sea border dispute.)

Feb 28 04:01 PM

[Hmm?!:]

I would use the Yen as a currency since it can be borrowed at practically 0%, Japan has no debt payment drag and they own $650 billion in US Treasuries if they ever do need cash.

GDP/GNP??? ....... It is debt/GDP unless you just want to sell all those assets you keep bragging about.




On Feb 28 06:22 AM James Lewis wrote:

> X-15 if other countires do not step up and buy Treasuries, then the
> Fed will expand their balance sheet and buy them. This is the modern
> form of printing of money.
>
> Please everyone note that countries around the world need to be holding
> a developed currency backed by large debt market in order to be involved
> in world trade. Therefore you are not going to see the major currencies
> Euro, USD and Yen all drop in tandem and all money repatritaed into
> local currency. This could only happen if globalistation contracted
> back to where it was 100 years ago.
>
> So one of the currencies needs to move up.
> Central Banks are funneling money to Gold to spread their holdings.
>
> But you can not trade using gold so its really only a hedge.
>
> Everyone keep son talking about how much Treasuries are coming on
> the market and the deficits the USA has but it is all relative to
> their huge GNP/GDP. And people always refer to the 30 trillion they
> owe on their balance sheet, but never consider the value of their
> assets (people, technology, financial colonial power, military network,
> domestic infrastructure). This is worth far far far in excess of
> 30 trillion, therefore assets exceed liabilities. And lets be fair
> there is certainly no cash flow problem as long as they control the
> system (which they do)
>
> I think Europe is in far worse shape so yo'll get a situation that
> money flows out of Euros and supports the dollar. I also question
> whether it would be wise for the Europeans to sell some of their
> gold holdings a these levels to shore up their financial situation.
> This could offer an interesting counter-intuitive move.

Mar 01 02:34 AM

[Conan the B...:]

Hard assets Like Gold will Probably be Sold by the Europeans because they have little else with which to work with in the ongoing crisis. Fund this and that, bailout entire Countries in addition to Businesses within those countries.

What do they have that is of worth Worldwide: Gold.

Besides, like the Author suggests, the exporters all want to Devalue their currencies. Holding gold will not devalue their currencies.

On the converse side, Devaluation means appreciation of other Currencies. The Currency they are trying to devaluate against, currently, is the USD.

So, for the time being, the USD will get stronger. Although Obama is doing his best to shrink the value of the USD, The US economy is only 20% of the World. What we do internally will be noticed but will not affect the rest as they Rush to weaken their currencies.

This won't last very long but just long enough to to shake the Confidence of those who feel the USD must go down.

Afterwards, Bye, Bye USD.

IMHO

Mar 01 12:10 PM