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Alex Carrick, Chief Economist at ConstructConnect
Alex Carrick, Chief Economist at ConstructConnect
Alex Carrick is Chief Economist for ConstructConnect. He is a frequent contributor to the Daily Commercial News and the Journal of Commerce. He has delivered presentations throughout North America on the Canadian, United States and world construction outlooks. A trusted and often-quoted source for … More »

The Greenback and Yuan are Ships Passing in the Night

February 15th, 2016 by Alex Carrick, Chief Economist at ConstructConnect

Article source: CMDGroup

The steep descent in the global price of oil began in early July 2014. It was rapidly accompanied by moderate to severe pullbacks in the posted charges for many other commodities.

Not by coincidence, late-summer 2014 was also the moment that launched many radical readjustments in currency values around the world.

Resource-supplying nations, suffering damage to their foreign trade balances, have been experiencing the most severe exchange rate declines ever since. Russia, Brazil, Australia and Canada are the prime examples.

The United States, viewed by international currency traders as a safe haven amidst all the turmoil, has seen its dollar move from strength to strength.

Nor has it hurt that as possibly the world’s most open economy, the U.S. marketplace has adjusted and recovered better than any other nation’s since the Great Recession. Indeed, U.S. employment and output have improved to such an extent that the Federal Reserve has moved out front among central banks in adopting a hawkish position on interest rates.

The Fed recently implemented a hike at a time when almost all others are standing pat, making cuts or contemplating increasingly dovish stances.

A yield hike, as the U.S. experience has shown, means more lift for the national currency (i.e., the ‘greenback’).

Graph 1 accompanying this Economy at a Glance demonstrates the remarkable surge in value of the U.S. dollar.

Graph 1: Amount of Foreign Currency that 1 U.S. Dollar (USD) will Buy
Amount of Foreign Currency that 1 U.S. Dollar (USD) will Buy
Data source: OANDA Forex Trading / Chart: CMD.

Versus July 2014, the greenback has more than doubled (+135%) versus the Russian rouble and nearly doubled compared with the Brazilian real (+87%).

Relative to the Mexican peso, Australian dollar and the Canadian loonie, it has advanced in a range of +35% to +42%.

It’s one-quarter higher (+26%) than the Euro and 20% up on the British pound.

The monetary authorities in Hong Kong and Saudi Arabia take deliberate action to keep their currencies at or near par with the U.S. dollar. Specifically, they use their substantial foreign exchange holdings – earned from net export sales − to buy their own currency.

Until recently, that also defined Beijing’s approach to managing China’s yuan exchange rate.

For reasons that have never been entirely clear, − but have perhaps related to national pride – the yuan was traditionally kept level with the U.S. dollar. China, after all, is pretender to the U.S. throne as the world’s number one economy.

That began to change with some significant downgrades in the GDP growth forecasts for the Chinese economy. What was widely reported as ‘real’ (i.e., inflation-adjusted) GDP expansion in a range of +10% to +12% a decade ago is now judged likely to be +7% at best.

Faced with a lower-growth scenario, and wishing to boost export sales, the People’s Bank of China (PBOC) first allowed the yuan to fall by 2% versus the U.S. dollar. Since the kick-off to 2015, however, the decline has accelerated. As Graph 1 shows, it is now -7%.

China began with a treasure chest of nearly $4 trillion USD in foreign reserve earnings for use in supporting its currency. That figure has recently fallen to $3.3 trillion. The $0.7 billion difference has been spent maintaining an orderly retreat in the value of the yuan.

The yuan would have fallen faster and further without such intervention.

Chinese citizens have been finding means to send cash out of the country at what is judged to be an alarming rate by the PBOC. They are carrying it out in suitcases. They are placing funds in Hong Kong brokerage accounts and then, sooner rather than later, moving their assets to other countries. This is one cause of hot residential real estate markets in Sydney and Vancouver.

Many of the newly rich in China are wary about investing in their own country, where the government remains omnipotent in financial matters and the share float in stock markets is too thin, leading to wild swings in valuation.

Beijing has already, on occasion, put a halt to equity trading and autocratically ordered banks to buy certain properties.

Besides, President Xi Jinping has launched a serious crack-down on corruption. Officials worried that they might be caught in his net are divesting and departing (if they can) as rapidly as possible.

Perhaps this is all coming to a head with the latest news out of China, where the man at the top of the nation’s statistics-gathering and dissemination agency has just been fired for engaging in ‘severe disciplinary violations’, which is bureaucratic code-speak for ‘corrupt practices’. Wang Bao’an is alleged to have participated in a nefarious affair termed the ‘Shanghai pension fund scandal’.

There have long been concerns that China’s enormous growth numbers have been biased to the up-side by a ‘cooking’ of the books. If there are doubts about Mr. Wang’s moral compass, those who appointed him will come under suspicion as well.

Speculation about China’s true economic performance is in danger of bubbling out of the pot.

Graph 2: Amount of U.S. Dollars (USD) that 1 Unit of Foreign Currency will Buy
Amount of U.S. Dollars (USD) that 1 Unit of Foreign Currency will Buy
Data source: OANDA Forex Trading / Chart: CMD.

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Category: CMD Group

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