Farrell: Trade War Diverted and Tony Did What?
Before we get to the brilliant sayings of the day, a few words about the latest Chinese moves on the yuan (or renmimbi, whichever you prefer). Also, delaying the delivery of a come-on title is a 'tease', but stay with me since one of the comments is truly idiotic.
Almost two years after the re-peg to the dollar, the People's Bank of China announced it would "...reform the RMB exchange rate...and enhance the exchange rate flexibility." Foreign markets rose substantially on the news and the US market responded in kind on the opening in NY (but it's not how it opens that is important, it's how it closes).
What it means is the Chinese currency will float within a narrow band in reference to an undisclosed basket of currencies, not just the dollar, and the euro will probably be included. The timing of the announcement shouldn't be too much of a surprise as the G-20 meets this weekend in Toronto. The politics of the move are obvious. This will head off any further talk about currency manipulation, at least for the time being.
The exchange band will remain the same on a daily basis (+/- .5%) and the RMB will be allowed to gradually increase in value. There will not be a large onetime adjustment against the dollar. There is a small school of thought that since the undisclosed basket of currencies will undoubtedly include the euro, if the euro continues to fall the dollar might even appreciate. That is not likely to happen but worth putting away for consideration. If the yuan appreciates as expected several consequences will occur.
The threat of a trade war between the US and China is greatly reduced.
The move should help combat Chinese inflation a little by making imports less expensive.
The only major country the Chinese have a trade surplus with is the US. Exporters to China should still see better trade as the richer currency buys more.
"Risk" assets in general are thought to benefit as China could buy more oil and gold if it chose to. China would have to buy fewer dollars in intervention moves.
That means it would have fewer dollars to spend on bonds so the Treasury market could weaken with a major buyer being less active. But all of these are sort of extreme in the stating. A big currency move would trigger all of the above. This is not likely to be a big move but much more a politically motivated gradual move.
It is a move off dead center, however, and the trade in these items might get exaggerated for a while. They always do and then calm down. Natural resource stocks (gold and oil), metals and mining, oil equipment and drilling have moved on such currency manipulations in the past. It could be, though, the BP shadow will temper that. Agricultural products tend to do well as 'their' money buys more. Or we think it eventually will and we bid the stocks up in anticipation of that happening. Retail, home furnishings, autos, airlines, and homebuilding have underperformed in the past when a currency moved favored other nations. But this is not that big a move by China and the bigger play seems to be the publicity it is generating.
Quickly, the news out of Europe is generally good.
The Greece Minister of the Economy sees that country's growth resuming in 2011.
Moody's sees the risk of a Greek default at 7% over 5 years and Greece again announced over the weekend it wouldn't/didn't have to restructure its debt. Germany's Finance Minister said he expects 2% growth for his country this year compared to 1.4% previous expectations.
Dominique Strauss-Kahn, an International Monetary Fund director, said in our first "he really said that? segment" that he had confidence "...in the medium and long run prospects for the Spanish economy provided that the efforts that have to be made are made." Isn't that like saying you'll win the game if you score more goals than the other team?
But the best is Rep. Joe Barton and not because he called the $20 billion BP willingly put into a rehab fund a shakedown. When the world came down on his head, he rushed back to chambers and said, "If anything I have said this morning has been misconstrued to the opposite effect, I want to apologize for that misconstrued misconstruction." And people actually voted for this guy. And forget about Tony Hayward, the BP Chairman. First day off he went to watch his yacht race.
Clueless, totally clueless.