The “currency war” appears to be experiencing a truce for now, the USA admin. is using a far more conciliatory tone and employing improved diplomatic language when describing the value of the Yuan and the supposed harm it’s inflicting on the USA economy.
The U.S. Treasury avoided labelling China a currency manipulator on Tuesday, but instead gently questioned and probed the country for not moving quickly enough on exchange rate reforms. The United States did, however, criticise Japan for stepping into the currency market in order to stem the yen’s rise, whilst urging South Korea to use such interventions sparingly. The Treasury is obvious deeply concerned with regards to the value of the dollar in 2012, particularly after the announcement that the second part of the combined $2.4 trillion debt ceiling requires enactment.
The USA admin. and Treasury does appear to be very concerned with regards to the recent concord entered into by China and Japan and rightly so, I highlighted this in my forex market commentary of yesterday. This direct trade, circumnavigating the use of dollars, should not be overlooked or underestimated given it’s the most significant agreement of its type China has entered into.
The value of the yuan has risen 4 percent versus the dollar in 2011 and 7.7 percent since China dropped a firm peg against the greenback in June 2010. The Peterson Institute for International Economics recently estimated the yuan was undervalued by 24 percent versus the dollar, down from 28 percent earlier in the year. It attributed the change to both Beijing’s policy of gradual currency appreciation and higher Chinese inflation.
The central point of the friction between the two countries is the U.S. trade deficit with China that swelled in 2010 to a record $273.1 billion from about $226.9 billion in 2009. The cumulative Jan-Oct deficit with China is on track to top that this year, running at around $245.5 billion. However, that trade deficit number could swell once more if the value of the dollar is severely impacted in 2012, a value that China can’t prop up if the USA self inflicts its own FX wounds.
The Treasury’s decision not to label China a currency manipulator sent a “clear and positive signal” that would soothe the market and benefit trade, according to a commentary in Xinhua, the Chinese state news agency, on Wednesday.
Beijing continually warned the United States throughout 2011 not to “politicise” the currency issue, some economists have pointed out that nations such as Japan and Switzerland have intervened in currency markets recently without drawing Washington’s criticism, until now. China is the biggest foreign holder of U.S. Treasuries, with about $1.1 trillion, a position that gives it leverage in international economic negotiations. Foreign exchange traders had not expected a change of U.S. tactics.
European stocks extended their gains, the benchmark index rising for a fourth day, as Italy’s borrowing costs fell at an auction of 179-day bills. U.S. index futures advanced, while Asian shares dropped. The Stoxx Europe 600 Index gained 0.5 percent to 243.16 at 10:16 a.m. in London. The gauge rallied 2 percent in the previous three sessions as investors turned attention from the euro-area debt crisis to U.S. data that showed the recovery in the world’s largest economy is gathering pace. Futures on the Standard & Poor’s 500 Index expiring in March gained 0.2 percent. The MSCI Asia Pacific Index retreated 0.6 percent.
Italy sold the bills at an average yield of 3.251 percent compared with 6.504 percent at an auction of similar-maturity debt on Nov. 25. More details were awaited. The government was scheduled to sell 9 billion euros of 179-day bills and as much as 2.5 billion euros of zero-coupon 2013 bonds today. It will auction as much as 8.5 billion euros of debt due in 2014, 2018, 2021 and 2022 tomorrow.
The yen strengthened for a fourth day versus the euro and the dollar as concern Europe’s debt crisis will push up the region’s borrowing costs and damp economic growth boosted demand for safer assets. Japan’s currency appreciated versus 12 of its 16 major counterparts as Italy auctioned debt and before a report tomorrow forecast to show business confidence in the Mediterranean nation fell to the lowest level in almost two years. The yen also gained as Asian stocks declined. Demand for the dollar was tempered as data signalled a recovery in the U.S. economy is gaining momentum.
The euro has weakened against all but one of its 16 most- traded peers this month. The 17-nation currency has declined 2.8 percent versus the dollar, and lost 2.7 percent against the yen.
Oil traded close to the highest in six weeks after Iran threatened to block crude supplies through the Strait of Hormuz at a time when U.S. stockpiles are falling. Oil for February delivery was at $101.04 a barrel, down 30 cents, in electronic trading on the New York Mercantile Exchange at 9:21 a.m. London time. It added 1.7 percent to $101.34 a barrel yesterday, the highest settlement since Nov. 16. Futures climbed 11 percent this year, extending last year’s advance of 15 percent.
Brent oil for February settlement was down 83 cents, or 0.8 percent, at $108.44 a barrel on the London-based ICE Futures Europe exchange. The European contract’s premium to crude in New York was $7.40 a barrel, compared with $7.93 at yesterday’s close, the smallest differential based on settlement prices since Jan. 20. About 15.5 million barrels of oil a day, or a sixth of global consumption, passes through the Strait of Hormuz between Iran and Oman at the mouth of the Persian Gulf, according to the U.S. Energy Department. Iran’s navy started a 10-day exercise east of the passage that involved the use of submarines, ground- to-sea missile systems and torpedoes, Press TV said Dec. 24.
Market snapshot as of 11:00 am GMT (UK time)
The yen gained 0.2 percent to 101.61 per euro at 10:26 a.m. in London after rising 0.2 percent over the past three days. The currency climbed 0.2 percent to 77.71 per dollar, extending this year’s advance to 4.4 percent. The euro was little changed at $1.3076, having fallen 2.4 percent in 2011.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six major trading partners, was little changed at 79.760.
Asian/Pacific markets mostly fell during overnight/early morning trading the CSI being the exception closing up marginally at 0.13%. The Nikkei closed down 0.2% and the Hang Seng closed down 0.59%. the ASX 200 closed down 1.25% currently 14.4% down year on year. European indices have faired well in the morning session, the STOXX 50 is up 0.73%, the UK FTSE is up 0.66%, the CAC is up 0.86% and the DAX is up 0.15%. ICE Brent crude has fallen by $0.91 and Comex gold is $5.80 per ounce.
There are no economic calendar data releases that investors should be mindful of in the afternoon session.