Yesterday Treasury Secretary Geithner wrote an op-ed in the Financial Times titled 'What the world must do to boost growth." The piece is important in a number of ways. First it was published in the Financial Times. For the U.S. government this is seen as the newspaper for the international audience. When looking to talk to a U.S. audience they use the New York Times. When seeking to talk to Congress they use the Washington Post, much as Fed Chairman Bernanke did last year after the announcement of QE2.
The Treasury secretary made a number of statements in his op-ed. We will go through them line by line. We believe the U.S. Treasury is very frustrated by the lack of progress in fixing the global imbalances discussed at South Korea's G20 meeting in the Fall of 2010, and through that the "Grand Bargain" into at that time.
"The shocks behind the slowdown - oil prices, Japan's disaster, the crisis in Europe - are severe enough to have been dangerous even if they had happened during a global boom."
Note there is no mention of any ongoing issues in the United States, specifically the foreclosure and mortgage overhang, the ongoing U.S. fiscal challenges of the pending law suits against U.S. financials from the FHFA. The Treasury Secretary is passing the blame abroad, with no assumption of blame whatsoever.
"First, the U.S. should act to strengthen growth and employment. President Obama will push for the very substantial package of public investments, tax incentives, and targeted jobs measures put forward on Thursday night, combined with a carefully balanced mix of fiscal reforms designed to restore fiscal sustainability over the medium term."
President Obama said in his speech last night "I want to see more products sold around the world stamped with three proud words: "Made in America." The only way we see U.S. goods selling better around the world is if the U.S. is in a better competitive position. Most other countries in the world see the most direct way to doing this is through artificially weakening their currency. This is the policy most recently applied by the Swiss National Bank with their fixing of the CHF to the euro at 1.2000. It is also practiced by the Asian countries including China, South Korea, Thailand, Taiwan and the Philippines. It is also practiced by Latin American countries including Brazil, Chile and Colombia. It is hard for the U.S. to find competitiveness abroad when U.S. goods are priced out of global competition by the 'strong dollar policy' of the United States. Innovation does not make U.S. goods cheaper; rather a weaker USD in the global marketplace does. This ties in with the U.S. administrations goal of doubling U.S. exports over the next five years. You double U.S. exports by weakening the USD, a policy that seems obvious to every other country in the world.
"Second, Europe needs to take more forceful action to generate confidence that is can and will resolve its crisis. This requires governments working together and alongside the European Central Bank in an unequivocal commitment to support Europe's financial system and ensure governments can borrow at sustainable interest rates as they reform."
The Treasury Secretary is incredibly frustrated with European policy makers. This is a similar frustration that was held by the Treasury Secretary following the G20 meeting in South Korea in the Fall of 2010. Back then Undersecretary of the Treasury Brainard was dispatched to Europe to talk with President Sarkozy and Chancellor Merkel, resulting in their voicing their support for the euro. This time Geithner is dispatching himself. It is important that Europe address their issues because, as outlined in our 'Grand Bargain' discussion in 2010, the only way that the Chinese can appreciate the CNY is if the EUR/USD moves higher. The frustration comes because the only way it can move higher despite U.S. QE is if Europe speeds up its Fiscal reforms and creates a European Fiscal Union. We believe the road-map has been developed. It is the pace of this reform that is most worrying. Every month that goes by without action gives the market another month of excuses to sell the EUR/USD. This further prices out U.S. goods from the international market and puts political pressure on China to strengthen their currency - which they are unable to do with a weaker EUR/USD.
"Finally, China and other emerging economies need to continue to strengthen domestic demand and allow their exchange rates to adjust to market forces."
Quite simply the Treasury Secretary is asking Asia and Latin America to strengthen their currencies against the USD so that U.S. goods can compete in the world market. It is hard for the U.S. to compete selling a widget if the U.S. good is priced 20% more than the same widget produced in China. The easiest way to bring around competitiveness is if China strengthens their currency by 20% ... Now the playing field is leveled. Of course, the only way that China and other emerging nations can do that without slowing their own economies is if they replace exports with internal demand. Thus the call for strengthening domestic demand.
"We need more progress in re-balancing global demand, with broader and faster appreciation of the remnimbi and the other policies necessary to strengthen domestic consumption in China and other emerging economies with large external surpluses"
Once again, re-balancing is code for a weaker USD for the U.S. and stronger currencies for those with surpluses. In the same vein, my colleague Dan Dorrow, pointed out a few things in Bernankes speech from yesterday. "Even though Bernanke talked about how to have a strong USD in the long term by achieving the Fed's dual mandate, note how he speaks favorably about "international competitiveness" which has been driven in recent years by USD weakness, not by a sudden burst of relative (to the world) U.S. innovation/productivity." A weaker USD is in the mind of Chairman Bernanke too.
The stronger USD witnessed over the past week is not good for U.S. exports, nor is it good for U.S. equities that rely on those export earnings given the lack of growth in the US. The EUR/USD is now trading at 1.3830 - this is below our call for it to be 1.5000 before 1.3900 from a few weeks ago - We have to admit we were wrong in this, as the speed of inaction in Europe outweighed our call for reserve manager diversification. However we remain constructive on the upside for the EUR/USD and see this downdraft as a short-term move that has driven and heated up U.S. policy makers' frustrations. We expect strong words and action from Treasury at the G7 meetings this weekend and from the Federal Reserve at their September meeting.
Certainly the break below the 200 DMA is worrisome for EUR/USD longs, however we believe with a very oversold RSI, and the combination of G7 chatter and Fed action coming through the rest of September we caution all-in EUR/USD shorts and remain negative the USD over the long-run. A strong USD is no longer in U.S. interest. The Treasury Secretary has noted it, as has the Fed Chairman.