Tag Archives: eur

My current trading positions as of Jan 25 2013

Hello fellow traders. I thought I’d try something new. I was thinking it might be of some limited value to share my current market biases in the hope of getting some discussion going either here on the blog or on my Forex Nirvana forum (I recommend the interactive trading section).

So as of today Jan 25 2013 my current trading biases (ie positions) are as follow:

1: Long any Yen crosses

2: Long EUR/USD

3: Long GBP/USD (although I’m having second thoughts on this as it looks like it’s not yet bouning back from oversold levels. Further downside is most likely, and it’s time to consider some exit strategy or to see how much pain I can take before I run for the door.)

4: Short USD/CHF (naturally if I’m long eur/usd)

That’s it for now. Good luck to you all with your trading!

I barely finished typing this post and it looks like my long eur/usd is paying off 🙂

European Debt Crisis Threatens the Dollar

The global economic situation is becoming more dire every day.  Approximately half of all US banks have significant exposure to the debt crisis in Europe.  Much more dangerous for the US taxpayer is the dollar’s status as reserve currency for the world, and the US Federal Reserve’s status as the lender of last resort.  As we’ve learned in recent disclosures, this has not only benefitted companies like AIG, the auto industry and various US banks, but multiple foreign central banks as they have run into trouble.  Nothing has been solved, however, by offering up the productivity of Americans as a sacrificial lamb.  Greece is set to be the first domino to fall in the string of European economies at risk.  Rather than learning from Greece’s terrible example of an over-consuming public sector and drowning private sector, what is more likely from our politicians is an eventual bailout of European investors.

The US has a relatively small exposure to overwhelmed Greek banks, but much larger economies in Europe are set to follow and that will have serious implications for US banks.  Greece is technically small enough to bail out.  Italy is not.  Germany is not.  France is not.  It is estimated that US banks have over a trillion dollars tied up in at-risk German and French banks.  Because the urge to paper over the debt with more credit is so strong, the collapse of the Euro is imminent.  Will the Fed be held responsible if the Euro brings the US dollar down with it?

The most disingenuous aspect of the narrative about the European sovereign debt crisis is that entire economies will collapse if more resources are not bilked from productive people around the world.  This is untrue.  Tough times are coming for the banks, to be sure, but free people always find a way back to prosperity if the politicians leave them alone.  Communities within Greece are coming together and forming barter systems because they know the Euro is becoming unstable.  Greeks are learning how to engage in commerce with each other, without the use of fiat currency controlled by central banks.  In other words, they are rediscovering what money really is, and they are trading with each other in ways that cannot be controlled, manipulated, squandered, inflated away and generally ruined by corrupt bankers and the politicians that enable them.  Farmers will still grow food, mechanics will still fix cars, people will still make things and exchange them with each other.  No banker, no politician can stop that by destroying one medium of exchange.  People will find or create another medium of exchange.

Unfortunately when politicians try to monopolize currency with legal tender laws, the people find it harder and harder to survive the inflation and taxation to which they are subjected.  Bankers should take their dreaded haircut rather than making innocent people pay for their mistakes.   The losses should be limited and liquidated, rather than perpetuated and rewarded.  This is the only way we can recover.

Government debt is often considered rock solid because it is backed by a government’s ability to forcibly extract interest payments out of the public.  The public is increasingly unwilling to be bilked to make bankers whole.  The riots and the violence in Greece should tell us something about the sustainability of this system.

If we continue to bail out banks and bankers so they can continue to lose money, if we cavalierly put this burden on the taxpayer, it is all too predictable what will happen here.

Ron Paul

Counting the Cost – Who Will Save The Euro?

european union stars

It is not just the banks that are in danger of going under. It is entire economies. They are the ones in need of emergency cash to stay afloat. For some time we have been saying that Europe’s financial ‘white knight’ may end up wearing Chinese armour or even a South American uniform?

Now it looks like all that is starting to come true. It started with a big splash in the Financial Times, saying Italian officials had turned to China for help in avoiding a financial crisis.

Counting the Cost also looks at the America’s Cup, once the domain of the millionaires and billionaires. Sailing’s Formula One event hits the waters of Plymouth, England, as it tries to cut costs and appeal to a younger generation.

Over the years the Cup has suffered from a bit of an image crisis, struggling with too much money and too many legal battles which have pushed both fans and investors away from the event. Can the America’s Cup change with the times?

Also, banks are back under scrutiny. UBS, the Swiss banking giant which bailed out with $50bn from Swiss taxpayers, hit the headlines again for all the wrong reasons.

The last time it was due to those dodgy mortgages. This time it is dodgy trades, or unauthorised transactions, says the bank. Whatever it is, the fiasco points to a lack of internal controls.

Now UBS has the task of restoring investor confidence, again.

Where Are The Euro Shorts?

If you simply looked at a chart of the Euro over the last year or so, and didn’t know about all of the problems facing the European Union, you could conclude that the Euro was just experiencing a pullback in an ongoing uptrend.  That’s how good the technical action in the Euro has been given the considerable problems it has been facing.  From the recent May high in the Euro at 149.40 to the July low of 139.50, the Euro is down a mere 6.6%.  This pullback so far isn’t even as big as the pullback in the Euro at the end of 2010.

The Euro has been rising ever since the end of the first wave of the Euro crisis that began in October 2009 and ran until May 2010.  The first Euro crisis was a much more severe downtrend.  It took the Euro down about 20% from over 150 to under 120.  The Euro was not able to have many positive weeks during that multi-month move to the downside.

The massive downtrend in the Euro helped drive a big upleg in the dollar over the same period.  But just like the Euro hasn’t been as aggressively sold off this time around, neither has other major foreign currencies.  The next series of charts highlights the period of the first Euro crisis on charts of the Pound, Yen, Canadian Dollar, Australian Dollar, Swiss Franc, and New Zealand Dollar.  Note that all of those currencies experienced sideways to downward trends during the same period as the Euro crisis, which helped drive the dollar higher.

Currently the Swiss Franc and New Zealand Dollar are making new highs against the U.S. Dollar.  The Yen, Australian Dollar, and Canadian Dollar are getting close to making new highs.  If those three currencies breakout once again against the dollar then trend followers need to take heed that this current situation is much different than the previous Euro crisis.  The currency markets could possibly be signalling that the U.S. Dollar downtrend would resume.  Taking a look at the current chart of the dollar shows an ascending triangle pattern on the weekly chart, with a breakout level of 76.  The dollar has failed twice so far to hold above 76 during the rally from May so that clearly is an important technical level.

The 76 level also coincides with the 30-week moving average that the Stage Analysis trend following method uses.  Currently the dollar is still technically in a Stage 4 downtrend, which it has been for most of the past decade besides a few major countertrend rallies.

So to summarize the Euro still has yet to come under the same magnitude of pressure it did during the last crisis.  If the shorts in the Euro fail to get aggressive and foreign currencies continue to be resilient against the U.S. Dollar then a continued U.S. Dollar downtrend could be on the horizon.

Justin Smyth

http://www.nextbigtrade.com

3 Currencies to Buy as Trichet Loses His Nerve

By Evaldo Albuquerque, Editor, Exotic FX Alert

Central bankers are some of the worst magicians in the world. Unfortunately, they love to use their sleight of hand on our monetary system.

As we saw last week, one of their favorite tricks is to make bad debt disappear.

Remember when all those mortgage securities went bad a couple of years ago? Then the Fed stepped in and waved its magic wand.

A little accounting magic and poof! These toxic mortgage securities disappeared.

But we all know that debt hasn’t really disappeared. It’s sitting right on the Fed’s balance sheet. Nothing has changed. It’s still debt that nobody is addressing.

In the end it’s just a bad magic trick that we all pay for in the long run.

I’m sorry to report the European Central Bank (ECB) is now trying its own hand at making debt disappear.

The good news is this is creating some intriguing opportunities in the currency market. I’ll tell you about them in just a minute. First let’s take a look at the latest magic trick in Europe…

How the ECB is Flushing its Credibility
Down the Toilet

In 1991, Trichet, now the chairman of the ECB, co-wrote the Maastricht treaty that created the EU currency bloc. This means Trichet personally helped write the rules that govern the European Union.

Now he’s throwing that rulebook away.

The treaty prohibits bailouts or any other form of monetary financing of member states. But so far, the ECB has helped bailout Greece, Portugal and Ireland. And the ECB has bought bonds to help finance the broke countries.

Last week, the bank went one step further in breaking its own rules.

Like any central bank, the ECB often gives loans to European banks. When it does, the ECB often takes bonds from debt-ridden countries as collateral. To avoid taking too much risk, the ECB used to require those bonds to have a good credit rating.

But last year the ECB made an exception for Greece. And now it’s doing the same for Portugal.

Last week, the rating agency Moody’s downgraded Portugal’s debt to junk status. Afterwards, the ECB decided to make a change.

Trichet announced the central bank will suspend its minimum credit-rating threshold on Portuguese bonds as well. In other words, the ECB is now prepared to hold more assets that may turn out to be very toxic.

Another Flip-Flop in the Making

Negotiations on how to solve the Greek crisis are still ongoing. At this point, the most probable scenario is that private investors will have to roll over Greek debt. Rating agencies have warned they will treat that as a “selective default.”

The ECB remains opposed to accepting Greek debt if such a “selective default” happens.

Trichet has said many times that the ECB would reject bonds with default ratings as collateral for loans. If he keeps his word, Greek banks will collapse without the liquidity provided by the ECB.

But we all know how much Trichet’s word is worth: not much.

Last year, Trichet said the purchase of government bonds was not an option. Four days later, the ECB started to buy bonds from Greece.

So it’s very likely the ECB will continue to accumulate bonds, even if they have a default rating. The ECB will not pull the plug on the Greek banking system.

And that’s a dangerous game. London- based Fathom Financial Consulting estimates a 70% write-down in Greek debt would cost the ECB about 25 billion euros. Its collateral would take a hit of 20 billion euros.

That’s enough to erase the ECB’s entire capital base.

In other words, when the inevitable Greek default finally comes, the ECB will have so much exposure to these toxic bonds that there is a real chance of it going insolvent.

And let’s not forget that the ECB also holds bonds from Portugal and Ireland.

What Does it All Mean to You?

Even if you don’t live in the EU, this has major implications for the currency markets.

Now does this mean the euro is finished? Not really. Remember, the Forex market is a relative game. So it really depends what you measure the euro against.

In the past year, for example, the euro appreciated 13% against the dollar. But it lost 10% against the Swiss franc, and nearly 4% against the Norwegian krone.

With the European debt crisis going on, a lot of people don’t understand why the euro can be so strong against the dollar. But to understand why that is, you just have to look at the last three words of the previous sentence.

It’s only strong against the dollar.

As an investor, this gives you the opportunity to buy the currencies that are beating out both the dollar and the euro, like the Swiss franc and Norwegian kroner.

Also, the fact the ECB is losing credibility is very good news for another currency: gold. It has gone up almost 15% against the euro over the past year.

Gold has also been pretty stable lately, despite the correction in other commodities. It just shows how the yellow metal is behaving much more like a currency than just a commodity.

As this euro mess plays out, gold will be yet another currency in the best place to profit – particularly if the ECB runs out of cash on its books.

Bottom line: the ECB will do whatever it takes to avoid a major crisis, even if it has to hold toxic bonds that may turn out to be worth as much as toilet paper. For you, this is a great opportunity to load up on gold and other sounder currencies, such as the Swiss franc and Norwegian Krone.

Best Regards,


Evaldo Albuquerque
Editor, Exotic FX Alert

Source: The Sovereign Investor

Short this Currency Now

euro

Back then, it took several billion to buy a loaf of bread. Another couple billion to purchase eggs, fabrics, sugar – basically anything you needed.

The price of everything was doubling almost every single day. Workers were paid three times a day to keep up with rising prices.

Inflation was rising by 29,500%…each month.

This was the reality in Germany, 1923. This traumatic event has gone down in history as one of the worst cases of hyperinflation ever. It also made the Germans almost paranoid about fighting inflation ever since.

No wonder the recent spike in commodity prices is already making Germans a little nervous.

And that has important consequences for the currency market. Monetary authorities in Europe are getting ready to fight inflation. For those of us who are ready, it will mean some killer opportunities in certain currencies.

An Economy Running on All Cylinders

The present-day Germany is booming. That’s the good news. The bad news is inflation is also on the rise.

Inflation measured by the Consumer Price Index is already higher than the European central bankers would like. It’s already above the European Central Bank (ECB) target. And official data actually underestimates the problem.

Unicredit Bank, one of the major banks in Europe, adjusted the official inflation by giving more weights to goods people buy most often, such as fuel, food and clothing.

This methodology makes perfect sense. It’s more likely to reflect the true level of inflation. The bad news is they concluded prices in Germany are rising almost twice as fast as the official rate.

Last month, the employment situation improved three times faster than the market expected. The unemployment rate is now reaching a two decade low.

German unions are already pushing for bigger wage increases. The country’s IG Metall union, for example, has asked for a 6% increase for workers at companies such as Volkswagen.

This demand for higher wages really scares the ECB. And the rising commodity prices don’t make things any easier for the central bank.

History is Likely to Repeat Itself

We’ve seen this before. So we can visualize how things will play out.

In 2008, there was a major rally in commodities, with oil spiking all the way to $140. At that time, the euro also surged on expectation of higher interest rates.

Higher oil prices increased the fear of inflation, forcing the ECB to hike rates in July. As you can see in the chart, it didn’t take too long for the euro to tumble.

Last Time ECB Hiked Rates, the Euro Took a Big Dive

Shortly after raising rates, the financial crisis escalated, forcing the ECB to cut rates to a record low. History may be about to repeat itself.

If commodities keep rising, the threat of inflation will escalate in Germany. The ECB may just make the same mistake it did in 2008, hiking rates at the wrong time.

While in 2008 the global financial crisis was behind the euro decline, this time I suspect internal imbalances will do the job.

Who Cares About the PIGS?

With prices of commodities skyrocketing, the inflationary pressures will only get worse.

That’s why the European Central Bank has already signaled it will raise interest rates if inflation fears escalate. And that’s what has been driving the euro higher recently.

Higher interest rates would be very appropriate for a booming Germany economy. But it’s certainly not appropriate for nations that are slumped in recession, such as Greece.

While employment in Germany keeps improving, the unemployment rate in countries like Greece and Spain has more than doubled in recent years.

But for the European Central Bank, it doesn’t really matter. They will always do whatever is best for Germany.

Higher rates will make the life of the PIGS (Portugal, Ireland, Greece, and Spain) a whole lot more complicated.

With austerity measures still biting, higher interest rates is the last thing those countries need. It may just send them into a very nasty deflationary environment.

Saving Germany Will Hurt the PIGS, and the Euro

That’s the problem when you have to use the same monetary policy to countries in very different situations.

It’s like giving the same insulin shot to two different patients, one diabetic and one healthy. The injection will do wonders for the diabetic, but it may just kill the otherwise healthy person.

So the European Central Bank has to decide between fighting inflation in Germany and saving the troubled nations. With rising commodity prices, a booming German economy, and the ECB’s natural inflation phobia, the Central Bank will most likely pick the first option.

That just confirms my view that the euro is going to fall from here. Be on the lookout for shorting opportunities.

Bottom line: Although higher rates will push the euro higher in the short-term, in the long-term, it will come back to bite the troubled nations. Stay short the euro!

Best Regards,


Evaldo Albuquerque
Editor, Exotic FX Alert
http://evaldo.worldcurrencywatch.com/

Why is the Euro Going Down

euro

When Western nations such as Australia and the US see their economies recovering and their job cuts slowing, it is easy for forget that many countries are still struggling with the effects of the Global Financial Crisis, several years on. For example, the Euro has seen some significant losses against the US dollar and this is due only in part to the Greek crisis.

Rather, this could be just the beginning of the collapse of the Euro all together if precise action is not taken, since a number of other member countries such as Spain are also struggling with high debt levels. As the Euro struggles to recover, that recovery is made even more difficult due to the lack of investor confidence – while the US Federal Reserve has been long established, the Euro is relatively new to the market and doesn’t offer the predictability or instill the trust of the Fed.

Plus, the Euro is going down in relation to the US dollar which is seeing increased demand thanks to European companies investing in the US dollar to get better value from their investments. US companies are also pulling out of foreign investments to secure their capital base at home and this shows a rise in the dollar value, when compared to the Euro.

The Euro in 2010

The European currency is constructed with a common central bank, but no common treasury and with a fixed exchange rate, a country is not able to depreciate their currency. Also, in the US, American states can benefit from transfer payments if they are worse off than other states, but that practice is not seen in Europe. As a result, the Euro has been severely tested and the Greek crisis has put the currency on its longest losing streak against the dollar since November 2008.

Even though it is predicted that Greece will survive its fiscal crisis, there are concerning budget deficits in other Euro-region countries such as Spain. Other countries facing similar difficulties to Greece could force the Euro to fail if institutional measures are not taken. The European finance ministers pledge to safeguard the financial stability of the Euro as a whole, but the currency may still disintegrate if the next step towards political union is not taken.

Options for EU Countries

EU countries are especially weak thanks to a single monetary policy, yet maintaining different fiscal policies. Despite this, the EU leaders have promised action to help Greece control its budget deficit, which could involve other EU countries selling their Eurobonds. This would allow Greece to refinance around 75% of its maturing debt and meet its targets, and the rest of the country’s needs can be met internally. Higher value added taxes are also being considered on luxury goods and energy products, and if enough progress isn’t seen from these measures, Greece will have to cut its capital spending.

Euro-area officials are also considering a plan to grant Greece approximately 25 billion Euros if required, and the funds may be coming from state-owned lenders such as Germany’s KfW Group. A tax on financial transactions may also be imposed to deter speculation on currency trading.

Why is the Euro Down?

Investors the world over know that Greece is in financial trouble and many are pulling their money from Greek markets, while European Union officials aim to instil confidence in investors. It is the investors who are pulling out who are creating the financial instability which has caused them to pull out in the first place.

While this vicious cycle is part of the reason the value of the Euro is down, investors are also selling up because they believe Greece is broke. As a result, it is a natural instinct to withdraw funds from a government which is in debt, and can’t handle its own finances, let alone your investments. It was in fact the Greek government’s irresponsible spending which lead to their current situation, where they continued to spend more than they made, and saw their debt levels reach approximately 94% of their GDP. It was at this point that investors wanted their money back.

At the same time, the fiscal policy of the US has raised their debt to 87% of their GDP and if current trends continue that rate is expected to be 95% by the end of 2010 and 105% by the beginning of 2011.

Solutions to the Falling Euro

In December 2010 the proposals to increase the bailout fund found a voice when the Belgian finance minster Didier Reynders backed the move as a chair on the EU’s economic affairs council. However, the German chancellor Angela Merkel does not see any need to increase the rescue fund which is already at 440 billion Euro. Merkel has also dismissed the creation of a Europe-wide bond on the basis that the bloc treaties do not allow for the creation of such a bond.

However, the rules which govern the operation of the rescue fund mean that the Eurozone is unable to lend the entire 440 billion Euro amount and if Spain and Portugal needed rescue funds, greater lending capacity would be required. At the same time, a Europe wide bond was rejected as a the solution to the Greek crisis in May 2010 on economic and legal grounds.

Instead, a more comprehensive solution is needed to effectively stabilize Spain and Portugal, and in turn strengthen the Euro. Where one European country after another is treated in the crisis does not offer a viable solution.

Currently, mass purchases of bonds by the European Central Bank have decreased borrowing costs for Spain and Portugal, who cannot expect the same bailout assistance offered to Greece and Ireland. Instead, a proposed Italy-Luxembourg plan was put forth to create a European bond which would allow the struggling countries to borrow at lower rates. However, the German finance minister is opposed to this plan, saying that as the interest rate risk is distributed to all Eurozone countries, it would not meet the EU budgeting rules.

The Irish government is working to regain control of its economy and presented its austerity budget plan to parliament which aims to cut 6 billion Euros of spending in 2011 and 15 billion Euro in the following four years. Ireland also maintained low corporate rates, despite opposition from France and Germany during the bailout.

The Future of the Euro

Despite plans, talks and proposals, the fate of the Euro still looks to be in doubt, with nearly $8 billion from traders and hedge funds being bet against the Euro, which is the biggest short position in the single currency since its launch. The build up of the net short positions is made up of more than 40,000 contracts traded against the Euro and shows investors are not confident that other European countries can manage their fiscal problems after the Greek crisis.

As a result, foreign business is likely to be much more wary about investing in the Eurozone and will require significant hedging of the currency. However, as the hedges are harder to get, foreign investments could cease all together, adding to the Euro’s problems.

The future of the Euro will be determined by the likelihood of a wave of sovereign defaults and what the Eurozone is willing to do to prevent these. For the Euro to survive a sovereign debt restructuring, a significant restructuring of the public and private debt in the struggling countries is needed. It is quite likely that there will be a wave of sovereign defaults because there is always an inherent danger in lending to sovereigns as they lack collateral. As a result, the security of their creditors is dependent on them being able to sell their debt to others for a good return.

The confidence of the creditors comes from the sustainability of the economy in relation to the prospective growth, and the interest rate. if growth is low, and interest rates are high, a larger surplus is required and the greater these costs are, the less confident investors will be. With rising ratios of debt to GDP, high interest rates and poor growth outlooks, options are not attractive to investors.

Since the funds on offer at the moment are not enough to finance all of the weak countries, the Eurozone will need to make changes to prevent future defaults. As a result, the restructuring of sovereign debts could trigger a wave of debt restructuring and see another tangent of the Global Financial Crisis. What is needed are transfers from the credit worthy to stabilize the un-creditworthy and the more swiftly that happens, the more likely it is that the Euro will return to normal sooner.

Alban is a personal finance writer at Home Loan Finder, a home loan comparison website.

China Knows the Fate of the Euro

Bryan Rich

This week, the U.S. Commerce Department gave China another pass on its currency manipulation, ruling against charges it was undercutting U.S. aluminum makers.

This puts China’s currency back on the radar for the politicians and others who, last June, were coaxed into thinking that China was making concessions on its weak currency policy. That’s when China announced they would be de-pegging the value of the yuan from the U.S. dollar.

But all of the bad interpretations surrounding China’s move off of the dollar peg this summer clearly show how confused financial market participants are on this issue …

The mainstream opinion is that China folded to the pressures from the rest of the world. That it opened the door to a big yuan revaluation, which would ultimately allow the currency to appreciate to the market’s estimate of fair value against the dollar.

That’s roughly 40 percent higher than current levels — a move that would go a long way in helping rebalance the global economy, which would be good for long-term global economic stability and growth.

However, that would entail China slowing its own economy at a time when world economies are vulnerable, all for the benefit of others. Not likely.

Instead …

History Is a Good Guide for
China’s Likely Course of Action

History shows us that China will continue to act in its own best interest by maintaining trade advantages. This, in turn, will allow the country to keep employing more of its billion-plus citizens, gathering global capital, and boosting its global economic prowess.

Just take a look at the recent history …

The chart below is the government-manipulated exchange rate of the U.S. dollar against the Chinese yuan. A fall in the exchange rate reflects a stronger yuan. You can see where China abandoned the peg against the dollar in 2005 (the red line) under the pressure of tariff threats by U.S. Congress.

Initially the Chinese government allowed the yuan to appreciate by 2.1 percent. In total, over the course of the next three years, the yuan gradually climbed another 15 percent against the dollar.

But you can also see in this chart, in late 2008 when the financial crisis was at its peak, China went back to a peg against the dollar (where the red line in the chart starts moving horizontally), which benefited them in two distinct ways  …

  1. It ensured that its most important consumer, the United States, would maintain its purchasing power, even as the U.S. dollar was retreating during much of 2009. And,
  2. Because of the dollar’s weakness, it created an even greater cost advantage in the global markets for China against its other Asian trading partners, whose currencies climbed sharply last year.

Now, after nearly two years of pegging their currency to the dollar, the Chinese are once again allowing some “flexibility” as they call it.

But there hasn’t been the major one-off revaluation of the yuan the markets have been looking for. Instead, as you can see in this shorter-term chart below, in the two months since moving off of the peg, the yuan strengthened only 1 percent against the dollar.

However, now that the world economic outlook has turned grim again, the yuan has reversed course against the dollar, weakening back toward the value of the recent peg.

Given the backdrop I described above, you might ask: Why would China alter its currency policy in the first place?

My guess:

China Wants a
Euro Hedge

What’s likely factored most heavily into China’s new currency strategy is the dismal outlook for the euro. Europe is China’s biggest export market. And the falling euro represents a major threat to China’s exports.

The euro lost nearly 20 percent of its value against the dollar from November 2009 to June of this year. All the while, China’s currency was pegged to the dollar. That means European consumers lost significant buying power against not only the dollar, but also against the yuan!

And with the structural problems surrounding the euro, it will likely resume its steep decline and may even result in a break-up of the monetary union — an end to the euro.

China is a highly export dependent economy, and maintaining a cheap currency plays a huge role in their competitiveness. So a continued revaluation of the yuan against the euro doesn’t sit well, especially given the prospects for another global economic slowdown.

China switched to a basket of  currencies to manage the yuan's exchange rate.
China switched to a basket of currencies to manage the yuan’s exchange rate.

That’s why China’s currency, under its new policy, trades against a basket of currencies, with about 60 percent less direct exposure to the dollar.

China wants its currency pegged to the dollar when the dollar is weakening. But they don’t want to be pegged to the dollar when it’s strengthening. And the latest policy dramatically diversifies away China’s exposure to a stronger dollar going forward — and consequently, the adverse effects of a weaker euro.

The key take away here: With the evidence of deflationary forces, depressed demand and the growing probability of double-dip recession, global central banks have been exposed as powerless to shorten what increasingly looks to be a long, drawn out period of economic malaise, fraught with economic shocks.

In that world, where sovereign debt defaults, global currency devaluations and a sustained safe haven rally in the dollar look likely, China has one goal: Protect its exports.

Regards,

Bryan