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Currency/Trade Wars, Begun They Have

Tyler Durden's picture




 

We have written extensively over the course of the last few weeks on the increasing rhetoric from Asia over currency fluctuations and furthermore how China was playing the US and Europe off against one another in a quasi-trade-war gambit. A flurry of headlines today/tonight via Bloomberg reminded us to revisit what is also a very worrying trend in Chinese CDS (and more broadly Asian sovereigns), as perhaps sophisticated investors look for the cheapest low cost long vol trades on a non-decoupled world devolving to its lowest common denominator.

Between Carney's 'substantially undervalued Yuan' comments, record slides in Dim Sum Bonds, growing concerns over growth longevity, Japanese retail sales, Aussie home prices, Sony's troubles in currency-land, and Barclay's warning of a restart to the Yuan peg in the case of global recession - contagion and transmission channels appear alive and well in global trade.

 

Via Bloomberg, this morning:

*CARNEY SAYS ADMINISTRATION `REVIEWING' CHINA CURRENCY BILL

*CARNEY SAYS CHINA CURRENCY `SUBSTANTIALLY UNDERVALUED'

followed quickly by:

Yuan Drop Spurs Record Slide in Dim Sum Bonds: China Credit

Yuan-denominated (Dim-Sum) bonds in Hong Kong are headed for record monthly loss, erasing gains for the year, as worsening outlook for global economy fuels concern China will slow pace of its currency’s appreciation.

which was 'helped' by this evening's comments:

*CHINA MAY RESTART YUAN PEG IN GLOBAL RECESSION, BARCLAYS SAYS

*STRONG CASE TO PEG YUAN TO BASKET OF CURRENCIES, BARCLAYS SAYS

And growing concensus that growth in China will slow significantly:

In the latest Bloomberg Global Poll of investors, most global investors and analysts, or 59 percent, foresee China will register economic gains of less than 5 percent annually by 2016.

that were around the same time as Sony's headlines hit:

*SONY SAYS EURO WEAKNESS TO HAVE `HUGE IMPACT' ON EARNINGS

*SONY SAYS IT HAS NO COUNTERMEASURES AGAINST WEAK EURO  :6758 JP

...noting that "Sony doesn’t buy many components from Europe, limiting its ability to benefit from euro weakness"

Which leaves Chinese CDS (denominated in USD remember) hitting their highest levels since early March 2009 as the spread between 5y and 10Y Chinese CDS rises to record wides of 74bps

While we suspect much of the steepening and widening of China sovereign CDS is speculative revaluation/global-recession bets, Chinese CDS still has a long way to go to meet up with the other global majors in terms of its risk relative to government bonds (since CDS have the implicit currency/devaluation premium and not just technical default).

Charts: Bloomberg

 

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Thu, 09/29/2011 - 01:52 | 1720966 The Deleuzian
The Deleuzian's picture

The problem I have and maybe it's naive but Central bankers have gold...Sure they mess with it but they have it...Central bankers react to silver like vampires... 

Thu, 09/29/2011 - 02:07 | 1720982 The Deleuzian
The Deleuzian's picture

I thought pieces of eight were silver not gold...

Thu, 09/29/2011 - 02:35 | 1721001 GoinFawr
GoinFawr's picture

Ar, ya got me there ye scurvy dog, but I reckon my point she still stands shipshape

Thu, 09/29/2011 - 01:47 | 1720963 viv_savage
viv_savage's picture

Would you expand on your statement that Freegold is impractical please?

Thu, 09/29/2011 - 01:56 | 1720972 The Deleuzian
The Deleuzian's picture

Not really familiar with this...Is this like Turks digital stuff... not very educated in this corner admittedly

Thu, 09/29/2011 - 03:40 | 1721042 Alpha Monkey
Alpha Monkey's picture

I think you should go back and read the gold trail and FOFOA a little more, contemplating what they are truly saying.  Gold is not going to be a currency, it's going to be a monetary standard, used primarily as a wealth asset.  Hence, it is for saving, not spending on candy bars and condoms.  They also clearly point out that paper currencies will remain in circulation as their usefullness is something the modern world cannot live without.  The papers will not be pegged to gold, but will be free floating allowed to compete against all currencies.  The price of gold in a currency is what will determine that currencys true value.

Thu, 09/29/2011 - 06:47 | 1721254 Prometheus418
Prometheus418's picture

I'll make a point of rereading it this weekend, to re-examine.

I guess I'm having kind of a hard time seeing how what you've described above is any different than what we have right now- Gold does float against any given currency, I look at the charts that describe that relationship every day, and makes for a reasonably solid inflation indicator.  I will admit, I had this same confusion when I read through it the first time- I just don't see why the system we have now would require a new label like Freegold.

I would be looking for a more radical change, like reverting to coinage- not because it is more convienient, but precisely because it is less convenient for central banks to produce from nothing.  For that to work, it would require some regulatory overhauls to the banking system, changing the bulk of transactions to vault service for individuals where an institution can charge storage fees, but would be prohibited by law from loaning another person's principle unless that person specifically deposited into an investment vechicle.  In a case like that, electronic wire transfers via debit card could still work for convenience or on-line purchases, but coinage would replace paper money in cash transactions.

It's possible- the bankers are the ones with the bulk of the PMs right now anyway, and they might get behind it to re-enforce their balance sheets.

Wed, 09/28/2011 - 23:38 | 1720779 reader2010
reader2010's picture

 "It's all about bucks, kid. The rest is conversation." 

- Gorden Gekko

Wed, 09/28/2011 - 23:44 | 1720786 PulauHantu29
PulauHantu29's picture

Trade wars will get intense. GM just raised their workers over $11,000 in wages and benies....the average asian worker makes about $6 a day....

 

Can you guess what is going to happen?

Wed, 09/28/2011 - 23:56 | 1720807 knukles
knukles's picture

GM will loose more money faster than they'd done previously and the gubamint will expropriate them again, showering their political buddies with public riches, round two, declare everyfuckingthing is Fixed Again II?

Thu, 09/29/2011 - 00:32 | 1720848 The Deleuzian
The Deleuzian's picture

Oh Absolutely!  Government Motors is a big huge scary problem...That coupled with a temporary 'strong USD' is tantamount to economic suicide...It's ironic that what made the US wealthy in the past will be it's undoing in the end...I doubt Bernanke will stand for a high USD for long...My big concern going forward is the 30 years running bond market bull...I'm beginning to wonder if this whole QE business of the last couple of years is the bond market's swan song?

Thu, 09/29/2011 - 00:21 | 1720857 DoChenRollingBearing
DoChenRollingBearing's picture

@ knukles

Green No. 2 is mine.

Unfortunately that is probably exactly what they will do.

And my family asks why I invested money in PERU (in our bearing company there)...

Thu, 09/29/2011 - 00:32 | 1720872 baby_BLYTHE
baby_BLYTHE's picture

GM will go bankrupt again with the coming collapse. All this Obama pandering about how he 'saved the auto industury' will be a joke in the history books half a century from now.

Wed, 09/28/2011 - 23:49 | 1720797 Zgangsta
Zgangsta's picture

I suggest a new strategy.  Let the drachma win.

Wed, 09/28/2011 - 23:55 | 1720804 freeasabee1
freeasabee1's picture

hey guys, if your bored of waiting for the collapse, or just wanting to fine tune your googling skill, try this puzzle.  i would just post it here but i dont know how.  i'm not pimping my blog, just bored tonight.

 

http://2012hipster.blogspot.com/2011/09/google-this-apple.html

Thu, 09/29/2011 - 00:00 | 1720817 RyanW525
RyanW525's picture

weed dealer is now only excepting junk silver....turned the paper shit away today!

Thu, 09/29/2011 - 00:10 | 1720832 Prometheus418
Prometheus418's picture

That seems like kind of a waste of silver, but whatever.  Lot of gun dealers, farmers, and smaller tradesmen are starting to lean that way as well.  Too much of a hassle for larger companies to change all their accounting yet, but smaller, nimbler folk are starting to get into the rythym of it.  I suppose a dope dealer would fit that category as well.

Thu, 09/29/2011 - 00:24 | 1720861 DoChenRollingBearing
DoChenRollingBearing's picture

Ryan, Prometheus,

That's an interesting trend guys.  Worth keeping an eye on.  I need to expand my network of people I know, get out more often...

Green for you two!

Thu, 09/29/2011 - 00:36 | 1720880 Larry Darrell
Larry Darrell's picture

What TPTB term the "black market" is in reality the only free market

 

And TPTB don't like free markets

Thu, 09/29/2011 - 00:01 | 1720818 Let them eat iPads
Let them eat iPads's picture

China's economy is hurtling towards the wall like one of their high medium speed trains.

Thu, 09/29/2011 - 00:03 | 1720822 Restcase
Restcase's picture

What these fools are doing is pushing China into a Euro-pegged currency or  a basket-backed currency peg or (buckle up, sparky) a gold-backed currency.

You have this enormous world economic power trading in a dollar-pegged currency. They are backing dollar hegemony even as they tinker with their exchange rate for personal advantage. If you are a Democrat and know absolutely nothing outside of Keynsian econ, you will want to screw with that to rebalance trade.

Clue: for every tweak on their FX rate that they do, you can counteract on this side - if you understand economics. They are pegged to the dollar. You control the dollar. Bingo - this is not a problem unless you graduated from Princeton with an economics degree.

As Another pointed out 20 years ago, the first one to adopt a gold-backed currency will trigger a nuclear metdown in world fiat currency. The thing that holds everyone back from doing that is this race to the bottom where the prize is "more exports." The one who has least to lose in this race-to-the-bottom trade war can nuke the rest of the pack by pegging to gold. This party will need a psychology the mirror image of Switzerland's; this party will need to want a strong currency. China seems to be gearing up to do this but the jury is still out.

Alternate scenario: the Euro was created specifically to compete w/$ as a trade settlement currency. China could easily adopt it. Loss of the Yuan/dollar peg will inflict pain on North America's sentient beings outside of government.

The ace in the hole of trade wars is pegging currency to gold. It's a nuclear option in that it makes your stuff expensive. It's a good thing in that you become ithe world reserve currency immediately.

The king in the hole is pegging to Euro. The fallout here is that with the dollar losing world reserve currency status, your dollar assets shrivel.

Thu, 09/29/2011 - 01:24 | 1720930 bid the soldier...
bid the soldiers shoot's picture

Restcase Thu, 09/29/2011 - 00:03

Sorry, the queen in the hole is the winner. That being the constant conferring and conversing of all the G20 central bankers, who know that if one of the major currencies falls, like a line of dominoes, they all will.

The queen in the hole was adapted by Benjamin Bernanke from a well known Hollywood movie.

“I, your Wizard par ardua ad alta, am about to embark upon a hazardous and technically unexplainable journey into the outer stratosphere to confer, converse, and otherwise hob-nob with my brother wizards.'

Par Ardua ad Alta.

You ain't just whistling Dixie. :o)

Thu, 09/29/2011 - 00:03 | 1720824 SoNH80
SoNH80's picture

BIIIIG trouble Dr. Jones!

Thu, 09/29/2011 - 00:09 | 1720831 Garbage Can Ray
Garbage Can Ray's picture

My hot European girlfriend: "You wanna fuck?" 

 

Me: "I can't fuck with silver futures down 15%" 

Thu, 09/29/2011 - 00:52 | 1720846 bid the soldier...
bid the soldiers shoot's picture

@Garbage Can Ray

Silver traders = a dime a dozen
Hot European girlfriends = once in a life time.

Maybe you should see a shrink.

Thu, 09/29/2011 - 00:11 | 1720835 Stuck on Zero
Stuck on Zero's picture

Trade wars.  These are the wars that the United States always loses.

Thu, 09/29/2011 - 00:12 | 1720837 chump666
chump666's picture

Asia is bid pre-German vote

C'mon Germany don't fall for that 2trillion conjob EFSF fund.

Thu, 09/29/2011 - 00:17 | 1720844 bid the soldier...
bid the soldiers shoot's picture

Outta here, get.

Thu, 09/29/2011 - 00:28 | 1720864 DoChenRollingBearing
DoChenRollingBearing's picture

Verde para la Mariposa!

Well ain't that something..

It's what I always have said: First rats off the ship win!

Thu, 09/29/2011 - 00:40 | 1720886 chump666
chump666's picture

More Yuan dumping as of now:

*The yuan falls to the low end of its trading band against the dollar for a second consecutive day

Thu, 09/29/2011 - 01:26 | 1720936 Byte Me
Byte Me's picture

Aaah Sooo...

Fluctuations ....

Thu, 09/29/2011 - 01:32 | 1720937 Dingleberry
Dingleberry's picture

These China-bastards have bribed both parties thru American traitor CEOs so they could not be labeled a "currency manipulator". How the fuck can any administration say (with a straight face) that these little bastards aren't pegging their currency low??? I guess when the money was flowing and American idiots had cash to burn at Walmart cause their cribs were appreciating daily, they didn't give a fuck. They could buy cheap shit all day long.  Now that they are competing for even low-wage jobs with these devious little shits......well now we have a problem!! 

Thu, 09/29/2011 - 01:39 | 1720949 bankruptcylawyer
bankruptcylawyer's picture

silve is NOT going back above 32 for another 6 months.

Thu, 09/29/2011 - 04:11 | 1720986 Money 4 Nothing
Money 4 Nothing's picture

Wrong, it will meet, and probably pass that tommorow morning once Countries see their Currencies comming apart.

 

The Bad Guy..

Thu, 09/29/2011 - 02:03 | 1720978 Richard Chesler
Richard Chesler's picture

Causality dilemma:

Which came first, the bankster or the corrupt government?

 

Thu, 09/29/2011 - 03:30 | 1721035 Martin T
Martin T's picture
Markets update -  the EM contagion.

"If you don't have a functioning financial system the world economy won't be revived. All the major economies have their responsibility to assist at a pace which is required to clean up the balance sheet of the banking system and to ensure that credit flows are resumed."
Manmohan Singh

http://macronomy.blogspot.com/2011/09/markets-update-debit-trading-em.html

Contagion time in EM.

Thu, 09/29/2011 - 04:13 | 1721069 eazyas
eazyas's picture

The early bird catches the worm, however, the second mouse gets the cheese.

Thu, 09/29/2011 - 06:24 | 1721204 Cycle
Cycle's picture

Not to mention the early worm gets caught by the bird.

Thu, 09/29/2011 - 06:37 | 1721227 Cycle
Cycle's picture

Uh, Clem.

 

The trade wars began 30 years ago when the US current account deficit with nations in Asia, Japan, Europe, and South America began to soar.  Recall that in a truly "free market" it is theorized that a currency from a country with a rising current account deficit falls at a rate in proportional magnitude to the rate of the rising current account deficit.

 

There was not and is no such thing as a free market - it was, and is, a highly toxic mercantilistic market with Asia and Japan especially pursuing industrial policies that screwed US manufacturers.  Recall at the time that our Congres responded to the combined pleas of the NAM (National Association of Manufacturers) and the AFL-CIO.  That's right, both the workers and bosses pleaded with Congress to abolish the Robert Rubin "strong dollar policy" as it was killing off manufacturing jobs.

 

But, Rubin did not work for the American people during his stay at the US Treasury. He worked for his ex-boss, Goldman Sachs. The US Treasury became the DC office of Goldman Sachs and their cronies.  They had invested hundreds of billions in Asia and Japan, and did not want to see their investments fall via any protective tariff.

 

Which - is allowed under WTO-GATT - any country that continues to have a trade surplus with another country can have a general tariff imposed on their goods and services if all other diplomatic attemtps at resolving the matter in a consenual fashion fail.

Thu, 09/29/2011 - 10:03 | 1721784 chinaboy
chinaboy's picture

Looks like some people is betting everything against China. I hope they bet with all they have on this "trade" because that's how the worst kind of speculators are wiped out.

For those with cool head I will only point out that the Chinese Yuan is mostly printed for the Chinese to use within its own economy.  Converted too high or too low against other currencies is a double edge sword for both side. For those who bet on high Chinese currency, why do you need so much Yuan paper when you really cannot use it in China? For those who believe high currency will change trade picture: What if trade picture stays unchanged after Chinese reeveluate the Yuan? (You need to figure out the FULL impliations).

 

Then all the blogger promoted is a "trade". Don't forget subprime used to be a "trade". When the trade gets too big...

 

Thu, 09/29/2011 - 13:52 | 1722671 johnjb32
johnjb32's picture

Good writing. There is an enormous amount of positioning for short-term advantage taking place which tells me that tremendous new volatility is looming. We've been documenting the first brush fires of trade and currency wars that have been predicted by many for more than a year. -- Michael C. Ruppert

 

http://www.collapsenet.com/154.html

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