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Bo Peng
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I run a fund based on automated trading and technical analysis. But my favorite pastime is thinking and talking about political economy. I guess I'm George Soros. Writing helps clarifying my thinking. All opinion expressed here is mine, wholly mine, nobody's but mine. And all trading/investment... More
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  • Currency War: US, China Against The Rest Of The World 0 comments
    Jun 7, 2010 5:13 AM

    Recent actions in the FX market has made it very clear, and confirmed what I speculated in early May: EMU is happy to see EUR devalue. They may intervene to halt a crash, but controlled descent is their goal. Their G-20 statement on fiscal discipline doesn't actually contrast their action (or more precisely, the lack thereof) in FX, because fiscal tightening is on a much longer time scale, taking years to show effect. Commodity currencies, of course, are plunging, also making their governments secretly smug.

    This leaves USD, JPY, and CNY the only major currencies standing erect.

    The game is clear. The rest of the world have all adopted the beggar thy neighbor strategy. They hope demand from US and China can provide the rope to pull them out of the multi-dimensional pit. Competitive devaluation has been talked about for awhile; now it's reality.

    Japan, of course, has no demand. They've been trying to get out of deflation for two decades; no reason their luck would change in this perfect storm, at least not for the better. JPY has been forced up by carry trade unwind. But I suspect BoJ has been hard at work trying to push it down. When the unwind finally finishes, they'll probably have some success.

    China, by pegging to USD, has suffered a quick reversal of fate and now stands as a major victim of currency manipulation. They could do a de facto devaluation by pegging to the currency basket that includes EUR, GBP, AUD, etc. But they overdid money printing in the panic of 08 and now face pressure from asset bubble and inflation. Devaluation would make their task of soft landing even more complicated. The best thing for them to do at this point is the thing they do the best: nothing, hold steady for now and see how things play out. Don't devalue. Don't even try to mop up the tremendous amount of money injected in 08/09 to stimulate domestic demand. They've been trying to create demand in emerging markets and beyond. It's a good strategy, but will not bear enough fruit in a hurry.

    US economy is in no shape to generate much excess demand, beyond the direct effect of currency appreciation, any time soon. Strong dollar is a double-edged sword to US economy. But there is a point beyond which dollar strength will mostly hurt. A possible turning point is if Q2 US economic data come in much weaker than the revised up estimates based on linear extrapolation from Q1. It may trigger a borad decline in USD.

    So, in the end, Chinamerica is the only giant left holding the bag. But they can only hold it for so long. If the rest of the world doesn't recover by that time, then it'll be global currency war and collapse of fiat money system.

    This G-20 meeting could very well go down history as the beginning of the end for its colossal failure of showing any sign of reckoning and corporation.

    Disclosure: Short EURUSD

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