- Commodities dip as China touches brakes (Financial Times)
- Yen responds to Kan’s call (Financial Times)
- More On China’s Frothy-Looking Housing Market (Naked Capitalism)
“The Chinese currency must definitely preserve its stability. This is good for the world as well … At a time when the world economy started recovering, appreciation or depreciation of our currency, instability, will not be beneficial for the world economy.”
Chen Deming, Chen Deming
FX Trading – Liquidity stuff at the margins again…hmmm
It may be a stretch to say China is now going to drain massive amounts of liquidity, having to pay penance for the error of its massive stimulus spending and subsidization ways (which it rightly accuses the West of the same). We have seen a degree of economic force feeding everywhere that usually wreaks havoc with the pseudo-market pricing system and leads to unintended consequences–usually the bad kind after the sugar-high wears off. Nothing new here — we have seen it before and will see it again.
But what may be important is that as liquidity drains even ever so slightly, it could have a powerful and exponential impact on financial assets from three sources:
- Absolute decline in liquidity
- Expectation of further tightening of liquidity
- Warts appearing across the system for sectors/companies hanging on by their last stimulus thread.
We don’t expect, as the Fed Minutes proved yesterday, anything drastic. All are still very concerned about ending this game too early—whatever that means. But interestingly, and we’ve discussed this before, the planets just may be lining up for that head-shaker whereby the real economy actually starts to improve, as the pricing system is restored, while the financial economy wanes. If you’ve made 80% on a stock investment, and it seems overdone, but now have the option of putting some of those profits to work in the real world—buying real assets/equipment/leases/etc.—you might just do it. It is possibly why the US non-farm payrolls tomorrow loom much larger than usual; stocks have just made a fresh new high everywhere it seems.
So this may have WHAT to do with the dollar? Well, back to non-farm payrolls. If they are better than expected, it does suggest healing in the US economy and could lead to the expectation of a surprisingly strong snap back in job growth, as we are expecting. Why? Precisely because real economy investment by companies evaporated, jobs evaporated very quickly, it could reverse just as fast.
Thus, on a relative basis, US real economy growth tips the global money flow dynamics clearly in favor of the US versus Europe and Japan; not so much elsewhere. Factoring in the weightings of the euro and Japanese yen in the US dollar index and good things can happen for dollar bulls—still a gather we know not fit for a quorum. (Key word above is relative; we don’t expect much given the still private sector deleveraging and overhang of public debt, but the US compared to Europe and Japan looks decent.)
Our view, we think, is more than a SWAG, but less than Goldilocks. It is a scenario at least where we see the probabilities increasing as the date stacks up. Stay tuned.