All the usual hyperbole about China’s “shanghai syndrome” has been enough to send the Australian dollar backtracking off its pre-crisis highs. Yes, the China trade and related issues are certainly important, but I have concerns that this latest analysis is mis-direction.
The first reason is that we seem to be seeing some “evidence” of the fact that China has not been able to deliver on its “goodwill” promises. Why is this a bad thing?
Well, maybe the world should stop asking for the goods and stop thinking they can do anything with it? It seems that China has gone back on the promises made in the Ma Ren/Xiaoquan/other speeches but why? Maybe because they are finding it a bit hard to execute on it.
Again, maybe it is something like if this European States cannot keep up the promise of “massive debt relief” then maybe they will stop trying, thus leading to future trouble for the IMF, ECB and “bad” debtor nations? You never know.
But a third point to the currency is that the Chinese are devaluing their currency… well sort of. Yes, but the currency has already fallen to lows that are dangerously close to hitting the dollar’s psychological level. And let’s face it, even a dollar is much better than two Chinese Yuan and more just looks like Chinese suppression.
Then again, my point is not to make a larger point, but simply to set the record straight that I think that is what this is. But before I go there, let’s get an overall view of the situation as we see it…
Indeed, a couple of other points… it appears that there is a little bit of Chinese manipulation of the exchange rate to further hurt the US dollar. Could it be so?
Yes, it is very possible that the Chinese are indeed trying to keep the Yuan down as the US dollar rises, or perhaps, keeping the Yuan down because it is a way to artificially slow the USD (making it more attractive). However, there is the current view that what they really are doing is holding back the USD growth (and to make it easier for the Federal Reserve to maintain steady interest rates).
If true, it certainly is just another episode of a dollar that is shooting up and then falling quickly. You cannot use the S&P/Case-Shiller index because it will not do the trick, so if the government had kept a watchful eye on the US inflation and growth the last couple of years, they would know that the dollar has not shot up or fallen very much.
In a nutshell, the yuan is a declining currency and it is being manipulated by the Chinese government, now. Of course, that is no reason to expect the US dollar to continue to rise in the near future (after all, I would say that the Chinese were manipulating the Euro and it has recently fallen as well).
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