As if the global downturn hasn’t already given the market the beating of its life, it looks as if another almighty bruising stands between now and the next decade. In fact, it could follow us there and beyond too.
For the past few years, the U.S. has accused China of playing dirty in the international marketplace by artificially undervaluing the yuan, saying it’s manipulating its currency by subsidizing its exports.
Other countries complain they have been pulled into the fray, as victims of a broader battle to remain competitive in a marketplace that has set new rules of engagement via currency manipulation.
While the U.S. pushes China to raise the value of its currency (so, among other things it can reduce its huge trade surplus with the world’s fastest growing economy), Japan, South Korea and Indonesia among others have intervened unilaterally to curb their currencies’ advances.
To manage their trade deficit, the U.S. is proposing to set up a target to rebalance global growth and realign or adjust exchange rates. But there is a growing fear that the current economic recovery is too brittle to support such a move, as export growth in many developed and emerging markets is largely due to the comparatively low value of their currencies — a deadlock that may lead to U.S. back to the ‘solution’ of protectionism.
Let us not forget that in the 1930s, this same protectionism led to a collapse of trade that set off the Great Depression. And the U.S. is already at a point where it will take nine years to replace the jobs lost during the recession.
The U.S. is surviving by printing more and more currency and through overseas borrowing. It has to impose huge taxes and prick inflated values where and whenever they balloon. At the same time, China has engaged the U.S. in vendor capital, providing the money that helps finance the huge U.S. fiscal and trade deficits, allowing Americans to buy more and more goods with the purported ability to make choices free from fiscal constraints.
One results is China’s reserves have crossed $2.6 trillion and are growing by almost a billion dollars a day, as they buy U.S. dollars and sell yuan to keep their currency artificially low, with little evidence of movement to the upside.
China argues that letting the yuan rise any faster would throw its export industry workers out of the domestic labor market, but at the same time, the undervalued yuan has already driven millions of Americans out of work, and Japanese too. Europe has been voicing its own concerns.
Money and words may well be the only weapons deployed in this war so far, but the collateral damage to the trading allies of the U.S. and China — and to people around the world — is tangible.
The threat the U.S. is using against these countries is if they don’t raise the values of their currencies, the Federal Reserve will continue its policy of quantitative easing: flooding the markets with cheap money and thereby hanging exporting nations who compete with one another.
So, as traders, we’re bracing for another shake-up as we enter the next decade — with turbulence, turbulence and more turbulence forecast across the forex landscape.
Mike Baghdady is a market analyst, syndicated columnist and commentator. He is a former head trader at the New York Board of Trade and and runs the London-based trading school Training Traders (www.trainingtraders.com).
