Thursday November 19, 2009 - 14:19:20 GMT
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Cinneas.com - blog.cinneas.com
Chess or Chicken? The Fed vs. China
The US met with China this past week to press for a stronger Yuan, China waived the issue. However this issue is not going away, and is now the greatest game of chess or chicken the financial markets have ever encountered. While the US prints USD, China is printing Yuan. China wants to keep the Yuan competitive so that it can sell cheaper exports, the US seems to want a weaker USD so that it can export itself out of the current economic situation. The problem in this game is it is very much one-sided. After all, China is buying USD, but the US is not buying Yuan.
In the end it is China that will have to give. They cannot continue to buy a declining currency forever so as to stimulate their own economy. Certainly they will try to diversify their USD holdings through the purchase of commodities and other USD denominated assets, but in the end they will have to capitulate and allow the Yuan to strengthen. We expect this to happen in mid 2010. When it does happen we expect other central banks in the Asia region will relax their USD purchasing programs.. Originally designed to keep their own currencies competitive relative to China. South Korea recently telegraphed that they are finding their USD purchases to be useless in fighting a stronger currency. These developments should see stronger ex-Japan Asian currencies relative to the USD going forward.
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