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This is How the Trade Pact Escalates the Currency War
This is How the Trade Pact Escalates the Currency War
When negotiators from 12 nations and hundreds of lobbyists from around the world, after years of horse-trading, agreed on a “trade deal” on Monday – a deal that remains secret except for the sections that have been leaked – President Obama gushed that it “reflects America’s values.”
The Trans-Pacific Partnership (TPP) pries open markets for American goods and services and impose rules on our trading partners that give “our workers the fair shot at success they deserve,” he said.
Similar praise ricocheted around the Pacific from Prime Minister Stephen Harper in Canada, and from politicians and heads of state in Australia, New Zealand, Japan, and the other participating countries. China isn’t part of the deal, but what the heck.
The free trade deal isn’t actually about “free trade.” Many provisions that have been leaked deal with reshuffling the power structure between corporations and democratic states at the expense of citizens and taxpayers.
So now this thing has to be ratified in the 12 countries involved. There might be one or the other hiccup – for example, Hillary Clinton has just come out against it to gain points in her battle to the presidency. “As of today, I am not in favor of what I have learned about it,” she told PBS, thus flip-flopping beautifully from when she, as Secretary of State, had backed the deal.
Despite these potential hiccups, delays, flip-flops, and re-flip-flops, I expect it to get ratified eventually by all 12 countries. Too many deep pockets have lined up behind it to let some elected politician screw it up.
Alas, there remains a little problem: does it really promote exports, which is what they all claim it does, or is that just hype?
That’s the question Krishen Rangasamy, Senior Economist at Economics and Strategy, National Bank Financial, in Canada asked in a note – and then provided the answer: um, no.
…click on the above link to read the rest of the article…
‘Sanction Spiral’: Russian Natural Gas Exports to Europe Soar
‘Sanction Spiral’: Russian Natural Gas Exports to Europe Soar
The infamous “sanction spiral” imposed on Russia by the US and Europe with such fanfare last year in the wake of the Ukrainian fiasco has receded from Western headlines. In Russia, it coagulated with the oil price plunge, and during the first two quarters this year, the economy shrank sharply.
But whatever the “sanction spiral” was supposed to accomplish, some countries in Europe, among them Germany, are desperately dependent on Russian gas to heat homes and offices, and to supply power plants and industrial installation. The threat that Russia would turn off the valve hung over the EU last winter. At the time, Eurocrats beat the bushes to explain that no one would be without natural gas. But not everyone believed it, including the German government [LEAKED: What Happens to Germany if Russia Turns off the Gas].
The scare seems to have left a lasting impression.
Or was it just about money?
Over the winter, Russian natural gas exports by pipeline to Europe dropped to the lowest levels in years, and were 22% below the five-year average, according to US EIAcalculations of International Energy Agency data. Exports dropped even further to 6.4 billion cubic feet per day (Bcf/d) in January and 5.3 Bcf/d in February, down 36% and 40% respectively from the five-year average for these months.
But in March, natural gas exports from Russia to Europe began to increase. And by the second quarter, they jumped 58% over the first quarter. In July, the most recent month for which data is available, exports hit 11.9 Bcf/d. Exports via the Ukraine decreased, but exports via the Nord Stream pipeline into Germany soared 55% year-over-year in June and 59% in July to a new record. To heck with any half-forgotten sanctions (2015 exports, brown line):
Then there’s the money.
…click on the above link to read the rest of the article…
Biggest Crash In South Korea Exports Since 2009 Confirms Global Trade In Freefall
Biggest Crash In South Korea Exports Since 2009 Confirms Global Trade In Freefall
While the market’s attention overnight was focused on China’s crumbling manufacturing and service PMI, data which was already hinted in the flash PMI reports earlier in August, the real stunner came not from China but from South Korea, which last night reported an unprecedented 14.7% collapse in exports, far worse than the -5.9% consensus estimate, and more than 4 times worse than July’s 3.4%.
The number is critical because not only do exports account for about half of South Korea’s GDP (with Samusng alone anecdotally accountable for 20% of the country’s GDP), but because it also happens to be the first major exporting country to report monthly trade data. That makes it the perfect barometer of global trade flows, or as the case may be, the canary in the global trade coalmine. It also confirms what we reported just one week ago when we said that “Global Trade Is In Freefall“.
The carnage in Korean trade is unmistakable in the following Barclays chart:
Putting South Korea plunging trade in context, this was the worst monthly decline since August 2009, and was coupled by an 18.3% tumble in imports, the biggest drop since February. Worse, South Korea may soon run into a true Black Swan: a trade deficit: in August, the country’s trade surplus tightened to just $4.3 billion, one third worse than tha $6.1 billion expected, and nearly less tthan half the $7.7 billion surplus in July, suggesting South Korea may be forced to dip into its reserves next, or finally engage in what many have said is long overdue: the next Asian currency devaluation as China’s FX war spills over to what may be the most important harbinger of global trade.
…click on the above link to read the rest of the article…
China: Doomed If You Do, Doomed If You Don’t
China: Doomed If You Do, Doomed If You Don’t
Whichever option China chooses, it loses.
Many commentators have ably explained the double-bind the central banks of the world find themselves in. Doing more of what’s failed is, well, failing to generate the desired results, but doing nothing also presents risks.
China’s double-bind is especially instructive. While there an abundance of complexity in China’s financial system and economy, we can boil down China’sdoomed if you do, doomed if you don’t double-bind to this simple dilemma:
If China raises interest rates to support the RMB ( a.k.a. yuan) and stem the flood tide of capital leaving China, then China’s exports lose ground to competing nations with weaker currencies.
This is the downside of maintaining a peg to the U.S. dollar. The peg provides valuable stability and more or less guarantees competitive exports to the U.S., but it ties the yuan to the soaring dollar, which has made the yuan stronger simply as a consequence of the peg.
But if China pushes interest rates down and floods its economy with cheap credit, the tide of capital exiting China increases, as everyone attempts to escape the loss of purchasing power as the yuan is devalued.
This is the double-bind China finds itself in: weakening the yuan to shore up exports incentivizes capital flow out of China, forcing the central bank to torch reserves to mediate the flood tide of capital fleeing China.
But efforts to support the yuan crush exports based on a cheap currency, creating the potential for mass layoffs in sectors with razor-thin margins and convoluted black box financing. Nobody knows how many times the stuff in warehouses has been pledged as collateral, or how much debt is floating around the shadow banking system in China.
Forget the Fake Statistics: China Is a Tinderbox (August 10, 2015)
…click on the above link to read the rest of the article…
Trouble South Of The Border
Trouble South Of The Border
Too big to fail is a seven-year phenomenon created by the most powerful central banks to bolster the largest, most politically connected US and European banks. More than that, it’s a global concern predicated on that handful of private banks controlling too much market share and elite central banks infusing them with boatloads of cheap capital and other aid. Synthetic bank and market subsidization disguised as ‘monetary policy’ has spawned artificial asset and debt bubbles – everywhere. The most rapacious speculative capital and associated risk flows from these power-players to the least protected, or least regulated, locales.
The World Bank and IMF award brownie points to the nations offering the most ‘financial liberalization’ or open market, privatization and foreign acquisition opportunities. Yet, protections against the inevitable capital outflows that follow are woefully inadequate, particularly for emerging markets.
The financial world has been focused largely on the volatility of countries like China and Greece recently. But Mexico, the third largest US trading partner (after Canada and China), has tremendous exposure to big foreign banks, and the largest concentration of foreign bank ownership of any country in the world (mostly thanks to NAFTA stipulations.)
In addition, the latitude Mexico has provided to the operations of these foreign financial firms means the nation is more exposed to the fallout of another acute financial crisis (not that we’ve escaped the last one).
There is no such thing as isolated “Big Bank” problems. Rather, complex products, risky practices, leverage and co-dependent transactions have contagion ramifications, particularly in emerging markets whose histories are already lined with disproportionate shares of debt, interest rate and currency related travails.
Mexico has benefited to an extent from its proximity to the temporary facade of US financial health buoyed by Fed policy, but as such, it faces grave dangers should any artificial bubble pop, or should the value of the US dollar or US interest rates rise.
…click on the above link to read the rest of the article…
Enjoy Canada’s low dollar while you can: Don Pittis
There’s not much you can do about the low loonie, so just look on the bright side
The low Canadian dollar is hurting John Stiles at Calgary-based Planet Foods. His company distributes natural foods and healthy snacks across Canada.
The cost of his U.S. imports is going up, but he can’t even raise his prices. The large well-known chains he sells to, such as Mountain Equipment Co-op and SportChek, only allow price changes every four or six months.
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“Like with the dollar right now, we typically can’t do a price increase till January,” says Stiles, who is in charge of operations.
Waiting it out
According to Stiles, the only real answer is to wait it out. In the roughly 15 years Planet Foods has been operating he has seen three wild swings in the Canadian dollar.
“It’s going to take six months to a year to get that back to 90 cents,” he says.
Of course there are no guarantees that the loonie will bounce back so quickly. But Stiles offers us a useful reminder. The lower the loonie gets, the more likely it will climb back out of those lows.
While a rebound in Canada’s traditional industries may take years, the impact on tourism has been immediate with Banff “thriving.” (CBC)
The classic example of why the lower loonie helps the Canadian economy is that it is an advantage for Canadian exporters. But while we’re waiting, I thought it might be a good idea to imagine some other advantages, if just to make us feel better.
Unfortunately, there are signs a promised industrial rebound may be slow in coming. New export industries don’t grow overnight. There are some estimates that, like the effect of interest rate cuts, the wait for a currency-led change in the industrial economy must be measured in years.
Not so the tourism industry, where the rebound has been almost immediate.
…click on the above link to read the rest of the article…
Low Oil Prices And China Pull The Rug From Under Latin America
Low Oil Prices And China Pull The Rug From Under Latin America
When China sneezes, the world gets a cold.
The world’s second largest economy is suddenly looking unstable, with economic growth slowing, the stock markets gyrating, and a surprise currency devaluation having taken worldwide markets by surprise. That could be bad news not just for China, but for a lot of countries that depend on exporting to China.
China’s phenomenal growth over the past two decades led to boom times for other countries as well. China is a voracious consumer of all sorts of commodities – oil, gas, coal, copper, iron ore, agricultural products, and more. For countries exporting these goods, the run up in commodity prices since the middle of the last decade has been extraordinary.
Nowhere is that more true than in Latin America. Countries like Brazil, Argentina, Chile, Peru, and Colombia have enjoyed strong economic growth rates because of China’s rapid expansion.
Related: Germany Struggles With Too Much Renewable Energy
But the boom times are over. Latin America is getting hit with a double whammy: the collapse in commodity prices and the sudden economic turmoil in China.
Low oil prices are hurting Latin America’s exporters. Mexico’s state-owned oil company Pemex has already slashed its budget for the year, cutting spending from $27.3 billion to $23.5 billion. Pemex has also borne the brunt of government spending cutbacks. And the much-anticipated first auction of Mexico’s offshore oil resources following a historic liberalization of its energy sector produceddisappointing results, as low oil prices scared away bidders.
Brazil has fared worse. Compounded by a colossal corruption scandal, Brazil’s Petrobras is drowning in debt as oil prices have plummeted. In late June, Petrobras announced it would slash spending by one-third, divest itself of billions of dollars in assets, and it lowered its long-term oil production target to just 2.8 million barrels per day (mb/d) by 2020, down from a previous target of 4 mb/d.
…click on the above link to read the rest of the article…
Canada “Getting Clocked” by Something Far Bigger than Oil
Canada “Getting Clocked” by Something Far Bigger than Oil
Canada is likely in a technical recession, after the economy shrank for the first five months of the year. It’s heavily dependent on commodities. The oil bust and the broader commodity rout have been blamed liberally. The theory goes that the problem is contained. The oil patch may be wallowing in the mire. But no problem, the rest of Canada is fine.
The swoon of the Canadian dollar against the US dollar has caused a bout of false hope that this would make Canadian exports of manufactured goods more attractive to buyers in the US and elsewhere, and that the economy could thus export its way out of trouble. This theory has now run aground.
Because the threat to manufacturing in Canada comes from Mexico.
“I think Mexico’s just a cheaper place to produce, and you have enough human capital and engineering skills to produce almost everything you can produce in Canada and do it a lot cheaper,” Steven Englander, Citibank’s global head of G-10 currency strategy, told Bloomberg.
And the multi-year swoon of the Canadian dollar against the US dollar isn’t going to help. Over the last three years, the loonie has lost 25% against the US dollar, the peso 21%. Over the past 12 months, the loonie lost 16% against the dollar, but practically in lockstep with the peso.
This chart shows the move of the two currencies against the dollar as a percentage change from three years ago. It’s like a downhill tango:
So devaluing the loonie sounds like a good old central bank solution. But it hasn’t boosted exports of manufactured goods:
The US dollar value of non-oil exports from Canada to the US reached $32 billion during the peak month in 2008, crashed during the Financial Crisis, and recovered, but by 2012 started petering out at $30 billion a month, has since lost ground, and remains below where it had been before the financial crisis.
…click on the above link to read the rest of the article…
U.S. Containerized Exports Fall Off the Chart
U.S. Containerized Exports Fall Off the Chart
“Many of our major trading partners are experiencing stalled or slowing economies, and the strength of the US Dollar versus other currencies is making US goods more expensive in the export market.” That’s how the Cass/INTTRA Ocean Freight Index report explained the phenomenon.
What happened is this: The volume of US exports shipped by container carrier in July plunged 5.8% from an already dismal level in June, and by 29% from July a year ago. The index is barely above fiasco-month March, which had been the lowest in the history of the index going back to the Financial Crisis.
The index tracks export activity in terms of the numbers of containers shipped from the US. It doesn’t include commodities such as petroleum products that are shipped by specialized carriers. It doesn’t include exports shipped by rail, truck, or pipeline to Mexico and Canada. And it doesn’t include air freight, a tiny percentage of total freight. But it’s a measure of export activity of manufactured and agricultural products shipped by container carrier.
Overall exports have been weak. But the surge in exports of petroleum products and some agricultural products have obscured the collapse in exports of manufactured goods. For now, the currency war waged by all the other major economies catches much of the blame:
The strength of the U.S. dollar against other currencies accounts for a significant part of the drop because of the relative price advantage our competitors have. There is concern that U.S. sellers—especially suppliers of agriculture products and food products such as meats—may have lost customers for good.
That’s the goal of a currency war. But wait… the dollar began to strengthen last year, while containerized exports have been dropping since 2012, when it was the Fed that waged a currency war against other economies, and when it was the dollar that was losing its value. So there are other reasons, long-term structural reasons unrelated to the dollar.
…click on the above link to read the rest of the article…
China Provides Another Threat to Oil Prices
China Provides Another Threat to Oil Prices
First it was a stock market meltdown, now it’s a weakening currency.
China continues to present significant risks to the oil market. On August 11, China decided to devalue its currency in an effort to keep its export-driven economy competitive. The yuan fell 1.9 percent on Tuesday, the second largest single-day decline in over 20 years. The yuan dropped by another 1 percent on Wednesday.
Related: Bullish Bets On Oil Go Sour
The currency move followed shocking data that revealed that China’s exportsplummeted by 8 percent in July. A depreciation of the currency of 3 percent will provide a jolt to Chinese exporters, but will slam companies and countries that export to China.
China insisted that the devaluation was a “one-off” event. “Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan,” the People’s Bank of China said in a statement.
Related: When Will Oil Prices Turn Around?
But it also appears to be a move to allow the currency to float more freely according to market principles, something that the IMF has welcomed. “Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets,” the IMF said. Although there is still quite a ways to go, the move is also seen as a prerequisite for the yuan to achieve reserve-currency status.
For oil, the move has raised concerns that oil demand will take a hit. China is the world’s largest importer of crude, and a devalued currency will make oil more expensive. On August 11, oil prices dropped to fresh six-year lows, surpassing oil’s low point from earlier this year. But with China’s economy – once the engine of global growth – suddenly looking fragile, it would be difficult to argue with any certainty that oil has hit a bottom.
…click on the above link to read the rest of the article…
Will China Play The ‘Gold Card’?
Will China Play The ‘Gold Card’?
(See “Credit deflation and gold”.www.goldmoney.com/research/analysis.)
The thrust of the article is that China, at some point, will have to revalue gold in China; which means, in other words, that China will decide to devalue the Yuan against gold.
Since “mainstream economics” holds that gold is no longer important in world business, such a measure might be regarded as just an idiosyncrasy of Chinese thinking, and not politically significant, as would be a devaluation against the dollar, which is a no-no amongst the Central Bank community of the world.
However, as I understand the measure, it would be indeed world-shaking.
Here’s how I see it:
Currently, the price of an ounce of gold in Shanghai is roughly 6.20 Yuan x $1084 Dollars = 6,721 Yuan.
Now suppose that China decides to revalue gold in China to 9408 Yuan per ounce: a devaluation of the Yuan of 40%, from 6721 to 9408 Yuan.
What would have to happen?
Importers around the world would immediately purchase physical gold at $1,084 Dollars an ounce, and ship it to Shanghai, where they would sell it for 9408 Yuan, where the price was formerly 6,721 Yuan.
The Chinese economy operates in Yuan and prices there would not be affected – at least not immediately – by the devaluation of the Yuan against gold.
Importers of Chinese goods would then be able to purchase 40% more goods for the same amount of Dollars they were paying before the devaluation of the Yuan against gold. What importer of Chinese goods could resist the temptation to purchase goods now so much cheaper? China would then consolidate its position as a great manufacturing power. Its languishing economy would recuperate spectacularly.
…click on the above link to read the rest of the article…
China “Loses Battle Over Yuan”, And Now The Global Currency War Begins
China “Loses Battle Over Yuan”, And Now The Global Currency War Begins
Almost exactly seven months ago, on January 15, the Swiss National Bank shocked the world when it admitted defeat in a long-standing war to keep the Swiss Franc artificially weak, and after a desperate 3 year-long gamble, which included loading up the SNB’s balance sheet with enough EUR-denominated garbage to almost equal the Swiss GDP, it finally gave up and on one cold, shocking January morning the EURCHF imploded, crushing countless carry-trade surfers.
Fast forward to the morning of August 11 when in a virtually identical stunner, the PBOC itself admitted defeat in the currency battle, only unlike the SNB, the Chinese central bank had struggled to keep the Yuan propped up, at the cost of nearly $1 billion in daily foreign reserve outflows, which as this website noted first months ago, also included the dumping of a record amount of US government treasurys.
And with global trade crashing, Chinese exports tumbling, and China having nothing to show for its USD peg besides a propped and manipulated stock “market” which has become the laughing stock around the globe, at the cost of even more reserve outflows, it no longer made any sense for China to avoid the currency wars and so, first thing this morning China admitted that, as Market News summarized, the “PBOC lost Battle Over Yuan.”
That’s only part of the story though, because as MNI also adds, the real, global currency war is only just starting.
And now that China is openly exporting deflation, and is eager to risk massive capital outflows, the global currency war just entered its final phase, one where the global race to the bottom is every central bank’s stated goal. Well, except for one: the Federal Reserve. We give Yellen a few months (especially if she indeed does hike rates) before the US too is back to ZIRP, maybe NIRP and certainly monetizing even more things that are not nailed down.
…click on the above link to read the rest of the article…
People’s Bank of China Freaks Out, Devalues Yuan by Record Amount, Vows to “Severely Punish” Capital Flight
People’s Bank of China Freaks Out, Devalues Yuan by Record Amount, Vows to “Severely Punish” Capital Flight
Everything has started to go wrong in the Chinese economy despite its mind-bending growth rate of 7%. Exports plunged and imports too. Sales in the world’s largest auto market suddenly are shrinking just when overcapacity is ballooning. The property market is quaking. Electricity consumption, producer prices, and other indicators are deteriorating. Capital is fleeing. The hard landing is getting rougher by the day. But Tuesday morning, the People’s Bank of China pulled the ripcord.
In a big way.
It lowered the yuan’s daily reference rate by a record 1.9%. The yuan plunged instantly, and after a brief bounce, continued to plunge. Now, as I’m writing this, it is trading in Shanghai at 6.322 to the dollar, down 1.8% from before the announcement. A record one-day drop.
The PBOC had kept the yuan stable against the dollar. As the dollar has risen against other major currencies, the yuan followed in lockstep. Over the past week, the Yuan’s closing levels in Shanghai were limited to vacillating between 6.2096 and 6.2097 against the dollar. Over the past month, daily moves were limited to a maximum 0.01%. The PBOC controls its currency with an iron fist.
Hence the shock to the currency war system.
The Nikkei, beneficiary of the most aggressive currency warrior out there, had been up, nearly kissing the magic 21,000 at the open for the first time in a generation, but plunged 200 points in one fell swoop when the news hit. Then the Bank of Japan jumped in with its endless supply of freshly printed yen, furiously buying Japanese ETF to stem the loss. The lunch break put a stop to all this. Then the Nikkei plunged again. Maybe the folks at the BOJ were late getting back to their trading stations. But now they’re back at work, mopping up ETFs.
…click on the above link to read the rest of the article…
China’s Hard Landing Suddenly Gets a Lot Rougher
China’s Hard Landing Suddenly Gets a Lot Rougher
This has become a sign of the times: Foxconn, with 1.3 million employees the world’s largest contract electronics manufacturer, making gadgets for Apple and many others, and with mega-production facilities in China, inked a memorandum of understanding on Saturday under which it would invest $5 billion over the next five years in India!
In part to alleviate the impact of soaring wages in China.
Meanwhile in the city of Dongguan in China, workers at toy manufacturer Ever Force Toys & Electronics were protesting angrily, demanding three months of unpaid wages. The company, which supplied Mattel, had shut down and told workers on August 3 that it was insolvent. The protests ended on Thursday; local officials offered to come up with some of the money owed these 700 folks, and police put down the labor unrest by force.
These manufacturing plant shutdowns and claims of unpaid wages are percolating through the Chinese economy. The Wall Street Journal:
The number of labor protests and strikes tracked on the mainland by China Labour Bulletin, a Hong Kong-based watchdog, more than doubled in the April-June quarter from a year earlier, partly fueled by factory closures and wage arrears in the manufacturing sector. The group logged 568 strikes and worker protests in the second quarter, raising this year’s tally to 1,218 incidents as of June, compared with 1,379 incidents recorded for all of last year.
The manufacturing sector is responsible for much of China’s economic growth. It accounted for 31% of GDP, according to the World Bank. And a good part of this production is exported. But that plan has now been obviated by events.
Exports plunged 8.3% in July from a year ago, disappointing once again the soothsayers surveyed by Reuters that had predicted a 1% drop. Exports to Japan plunged 13%, to Europe 12.3%. And exports to the US, which is supposed to pull the world economy out of its mire, fell 1.3%. So far this year, in yuan terms, exports are down 0.9% from the same period last year. As important as manufacturing is to China, this debacle is not exactly conducive to economic growth.
…click on the above link to read the rest of the article…
‘Perfect Storm’ Engulfing Canada’s Economy Perfectly Predictable
‘Perfect Storm’ Engulfing Canada’s Economy Perfectly Predictable
Years ago Andrew Nikiforuk, citing experts, warned where Stephen Harper’s priorities would lead us.
Economists, an irrational tribe of short-sighted mathematicians, are now calling Canada’s declining economic fortunes “a perfect storm.”
It seems to be the only weather that complex market economies generate these days, or maybe such things are just another face of globalization.
In any case, economists now lament that low oil prices have upended the nation’s trade balance: “Canada has posted trade deficits every month this year, and the cumulative 2015 total of $13.6 billion is a record, exceeding the next highest, in 2009, of $2.95 billion.”
But this unique perfect storm gets darker. China, which Harperites eagerly embraced as the globe’s autocratic growthlocomotive, has run out of steam.
As the country’s notorious industrial revolution unwinds, China’s stock market has imploded. Communist party cadres are now moving their money to foreign housing markets in places like Vancouver.
Throughout the world, analysts no longer refer to bitumen as Canada’s destiny, but as a stranded asset. They view it as a poster child for over-spending, a symbol of climate chaos, a signature of peak oil and a textbook case of miserable energy returns. Nearly $60-billion worth of projects representing 1.6 million barrels of production were mothballed over the last year.
A new analysis by oil consultancy Wood Mackenzie reveals that capital flows into the oilsands could drop by two-thirds in the next few years.
The Bank of Canada doesn’t describe the downturn led by oil’s collapse as a recession because the “R word” smacks of negative thinking or just plain reality.
Surely lower interest rates will magically soften the consequences of a decade of bad resource policy decisions, Ottawa’s elites now reason.
Meanwhile the loonie, another volatile petro-currency, has predictably dropped to its lowest value in six years along with the price of oil.
…click on the above link to read the rest of the article…
