Japan and China

While last week’s confirmed return to growth in the Eurozone maintained investor’s lack of appetite for the dollar, the latest GDP report set to shock the currency dynamic comes from Japan. Released as the Tokyo markets started their own trading week GDP growth for the third quarter came in at a staggering 4.8% on an annualized basis. That was more than twice the pace that analysts were expecting at a 2.2% rate. It’s also four times the pace of the second quarter. The good news for the Japanese economy is the first rise in corporate capital investment in six quarters.

As we piece together the news release, it’s the Japanese yen that is performing well in response to the news. Already it’s jumped to 89.43 per U.S. dollar. The dollar once again is weaker in early trade, while gold is again challenging last week’s record highs in Tokyo trade. The loss of value for the dollar last week attracted more comments from European officials who told reporters that a strong dollar was in the best interest of the United States. Even Timothy Geithner, treasury secretary travelling to Tokyo, told reporters that he was in favor of putting policies in place that would secure the fortunes of nations around the world who trust in the dollar as a store of wealth and unit of international transaction.  

Meanwhile a senior Chinese official at the weekend launched a blistering attack on U.S. monetary policy even blaming dollar weakness for boosting speculative investment in stock and property markets. The views of Chinese banking regulator, Liu Mingkang were very similar to those we reported last week from a Japanese banker who predicted a surging Japanese yen when investors realized that China was acting as little more than a giant warehouse for commodities and propping up prices in the meantime. Liu also said the global economic recovery gave little grounds for optimism, as it was driven largely by governments' stimulus spending rather than real corporate activity.
Liu Mingkang sounded off just as President Obama paid a visit to China, claiming that the American policy of holding down interest rates was prostituting an ever-weaker dollar. The so-called carry-trade in which the dollar is borrowed and sold short to create assets in higher yielding currencies is threatening a global economic recovery he claims, calling the weak dollar a “new systemic risk.”

He made his comments in an address to a financial forum in Beijing and blamed the dollar carry-trade for having a “massive impact on global asset prices.” He added that the dollar’s performance was " boosting speculative investment in stock and property markets and will pose new, insurmountable risks to the global recovery and, particularly, to the recovery in emerging markets."

Low U.S. rates make it pretty difficult for Beijing to raise interest rates independently since the Chinese yuan is heavily pegged to the greenback. If China raised rates it would more than likely boost the appeal of speculating further on Chinese equity and real estate markets. Liu Mingkang is already acutely aware that a sliding dollar is also eroding the value of China's $2.27 trillion of foreign exchange reserves, of which about two-thirds are estimated to be invested in dollar-denominated assets.
Nothing quite like a little controversy to get the week underway now is there?

The Supreme Council of the Secret Order of Jurojin

Tyche Research

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