Whether it's Chuck Schumer or another headline-hungry banker/politician/long-only-equity-strategist, the one note of constancy among global macro perspectives has been - China needs to re-value the Yuan. The "it's not fair" crowd or "everything will be fixed if we can just compete on equal terms" talking-heads may want to take a look at the BIS effective exchange rates. It is evidently clear that since 2005 the USA has been on a path of very considerable currency devaluation - down almost 16% while the Yuan has strengthened almost 38% based on the BIS effective exchange rates. The effective exchange rate (EER) provides a better indicator of the macroeconomic effects of exchange rates than any single bilateral rate and are described here. After this morning's comments from China, perhaps it is time for our Asian trade partners (or should we say vendor financiers) to raise the rhetoric that the US is the one not playing fair?
An effective exchange rate (EER) provides a better indicator of the macroeconomic effects of exchange rates than any single bilateral rate. A nominal effective exchange rate (NEER) is an index of some weighted average of bilateral exchange rates. A real effective exchange rate (REER) is the NEER adjusted by some measure of relative prices or costs; changes in the REER thus take into account both nominal exchange rate developments and the inflation differential vis-à-vis trading partners. In both policy and market analysis, EERs serve various purposes: as a measure of international competitiveness, as components of monetary/financial conditions indices, as a gauge of the transmission of external shocks, as an intermediate target for monetary policy or as an operational target. Therefore, accurate measures of EERs are essential for both policymakers and market participants. For a complete explanation on the methodology, please refer here.
(h/t Sean Corrigan)