Friday October 19, 2007 - 11:59:13 GMT
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Black Swan Capital - www.blackswantrading.com
A New Dynamic?
FX Trading â€“ A New Dynamic?
Though we have little clue as to what will come out of the G-7 meeting, the banter weâ€™ve seen suggest the currency focus will be on China. The now booming trade surplus between China and Europe and the relatively high level of the euro currency has European leaders now squarely in the game teaming up with the US Senate.
Earlier this week, Chinese central bank head Zhou Xiaochuan tried to do some pre-empting by saying China will allow for market forces to play a bigger role in determining the value of the yuan. He also said he was â€śsympatheticâ€ť to European concerns.
Weâ€™ve heard this stuff many times before from China. Maybe this time is no different. But before there hasnâ€™t been a good Chinese reason to let the currency move higher faster, now there is. Itâ€™s inflation!
With food prices and energy prices soaring in China, a stronger currency will go a long way to reducing the imported cost of these items. And reducing the cost of these items may go a long way to help stem some of the rising unrest among rural (poor) Chinese citizens. The China boom has benefited across the spectrum. But the â€śconnected classâ€ť who live and work in the cities have been the winners. Rural China, hundreds of millions, still struggle, some tremendously.
â€śRural China is still home to about 60% of the country's 1.3 billion people, but agriculture's contribution to GDP has fallen from more than a quarter in 1990 to less than 12% today. Central-government spending on agriculture and rural welfare as a proportion of total spending has similarly fallen from 8-11% in the 1990s to 7-8% for most of this decade. Thanks to a booming economy under Mr Hu and Mr Wen, the central budget is getting bigger and its expenditure is growing fast. But outlays on health care and education, as a proportion of total spending, remain lower than they were a decade ago,â€ť according to The Economist magazine.
(There was a very good piece entitled, â€śChina Beware â€ś, that appeared in last weekâ€™s Economist magazine. It didnâ€™t get much play, but points out there are many problems and opportunities for severe unrest in China.)
So, we think there is an increasing probability that Zhouâ€™s lip service, in front of the G-7 meeting, may be more than just lip service. If so, we think the primary beneficiary will be the Japanese yen.
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And maybe thatâ€™s why we are seeing the yen move with the pack this week against the dollar. Thatâ€™s a new dynamic.
Black Swan Capital
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