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Monday March 22, 2010 - 14:21:53 GMT
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“Our currency isn’t undervalued,” it is to laugh! But China has real fear.

Key News
•    Beijing will retaliate if the United States declares China a currency manipulator and imposes trade sanctions, Commerce Minister Chen Deming said on Sunday, firing the latest salvo in a spat over the value of the yuan. Chen again accused Washington of politicizing the issue ahead of an April 15 deadline for the U.S. Treasury to rule whether China is unfairly holding down its exchange rate to gain a competitive edge in global markets. (Reuters)
•    Industry body the CBI said it expected the [UK] economy to grow by 1% in 2010, with the recovery remaining subdued until the middle of next year. (BBC)

“Freedom is never more than one generation away from extinction. We didn't pass it on to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same.” —Ronald Reagan

FX Trading – “Our currency isn’t undervalued,” it is to laugh! But China has real fear.

It’s coincidently Orwellian to hear the land of the giant puzzle palace pretend their currency isn’t undervalued. The Chinese Ministry of Mis-information is burning the midnight oil, especially now since oil is back under $80 per barrel. Maybe we missed something in translation, but if we didn’t it’s ludicrous, even for the Chinese who prefer edict to argument, to argue about their currency valuation.

An argument can be made, however, as to whether or not wanted appreciation from the West will make much of a difference when it comes to trade surplus/deficits. The appreciation of the Japanese currency from the late 1986, when USDJPY was around 259, onward, did have some impact on the size of Japanese trade surplus with the US. There was an ebb and flow. But even with Japan’s currency in the 90-100 range, they still run a surplus and are sitting on a tidy reserve base.

So, it really is more than just the currency. Another empirical example: when the EURUSD was at 1.60 to the dollar German exports were doing just fine.

The Chinese are smart. They very well know their currency is undervalued. [And by the way, we didn’t hear China complain much concern about a weak dollar back in early 2007 when US consumers were gobbling up Chinese goods as fast as they could fill a container ship.] Back to the point: China’s real concern, I think, is that its growth and credit trajectory looks a lot like Japan’s in the early to late 1980’s. It fears the same fate if its currency were to rise in value.

Those who remember should remember Japan as the global capital juggernaut set to take over the world during the 1980s. China looks very similar today.

The following series of events we think were linked:
  1. 1987 stock market crash
  2. Improving US current account deficit removing demand from the market
  3. Japan government increasing stimulus to take up the slack
  4. Japan stock bubble breaks in late 1989 (I remember, and I think it was a year or two before the Nikkei topped around 39,000, when the late great John Templeton said he would not buy Japanese stocks again until the Nikkei 225 index crossed back under the Dow Jones Industrial average. The Dow was around 2,500 at the time. My dates might be slightly off, but John new the power of global rebalancing.)
  5. More stimulus from the government as US recession ensues in 1990 further damping US consumer demand for imports and the US current account improving even more quickly.
  6. Much of that credit stimulus from the Japanese government goes directly into the huge bubble in Japanese real estate. (I draw your attention to an article by Takatoshi Ito, writing in the Financial Times last Wednesday (3/17): “China’s property bubble is worse than it looks.” In fact, Ito also talks briefly in this article about the same topic here: China belief the currency appreciation is what doomed Japan into a lost decade of growth or more.
We have talked about China’s fear of becoming the next Japan often in our seminars on global rebalancing. We summed it up in the PowerPoint slide below. This one was taken from a presentation we did in Las Vegas back on early August 2009.

The line in the chart below represents the quarterly US Current Account Balance. Notice the timing of when it showed some significant improvement last time: late 1986 to around 1992. This time, the improvement was triggered by the credit crunch, and on a relative basis has improved even more than last time. Read this as US dollar based credit (or demand for imports to the US) as falling. This time around of course, China is the superpower creditor nation, as Japan was last time around. [Chart not available in text format.]

One more thing all you dollar perma-bears might want to consider: The dollar entered a 10-year bull market in 1992 (Just around the time we saw the peak of improvement in the current account balance). Hmmmm…..

Jack Crooks
Black Swan Capital

David Newman here… “Investing vs. Trading”

Investing in currencies for the long haul means using currencies as another asset class in your portfolio. An asset class that will stand along stocks and bonds and hopefully provide some much needed diversification.

There are plenty of low leveraged long-term investment choices available to you so you can make real money in currencies. They are called Currency Exchange Traded Funds (ETFs). An ETF is a simple straightforward currency product that you can buy and sell in your standard equity brokerage account. It’s the same as buying any other fund traded on the exchange.

We offer recommendations on Currency ETFs in our month Currency Investor newsletter. We don’t recommend trading them; we do recommend investing in them using a long-term buy and hold strategy.

Here let me give you an example…

Last August we recommended an ETF that appreciates when the Euro declines in value verses the U.S. Dollar. As I write this note today that trade is up over 18%. Not bad for six months (and we believe there’s a lot more profit still to come in this trade alone). We’re also holding positions in the Yen, the emerging markets, the U.S. dollar and more.

To sum it up: Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.

In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations over time.

Our analysis is comprehensible and our recommendations consist of ETFs, as I said. So don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.

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Thank you.

P.S. And, our newest report – Why the Euro will go to par or beyond against the US dollar.

Join today and get yours Free.

All the best,

David Newman
Director of Sales and Marketing
Black Swan Capital
[email protected]
Phone: 866-846-2672


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