Oil is down because the dollar exchange rate is up?

Foreign Exchange - Currency Outlook

We had the US stock market rise on a really stupid report that the unemployment rate was not rising (with the global market following). We say "stupid" because obviously the rate was a function of many workers falling out of the job market as the government defines it, so not exactly a rigged number but not an accurate one, either - and everyone knows it. Now we have the Shanghai Composite leading the world’s stock markets, with nary a reference to better-than-expected earnings or P/E ratios or any of the usual chatter about underlying, dare we say fundamental, conditions in the US or elsewhere. We like to joke that stock market traders are a bunch of flibberty-gibbet little girls, alternately hysterical or skipping madly down the street (and failing to look down). But never has such a description been more appropriate. Stocks are down because a butterfly flapped its wings in China, thousands of miles away? Oil is down because the dollar exchange rate is up? How old are these people?

The germ of truth in all this is that China has defied conventional wisdom and managed to make its stimulus package work faster and better than anything in the West (except Cash for Clunkers, which is wildly successful in Europe and the US). Growth will still be huge, 8% if not the 9.5% originally expected, while the rest of us will be lucky to see 1-3%. China still depends to some extent on the US consumer for export business, but has robust two-way trade with Germany and Japan, so maybe the US doesn’t lead the world, after all. But China doesn’t lead it, either. We all know that Chinese banks would be both involvent and bankrupt if they were not state-owned and the borrowers mostly state-owned, too. Property and other asset prices are almost certainly inflated. The Shanghai index is a bubble - again. Any kind of reality-check would have investors fleeing for the hills - and yet China is the best game in town. It offers unknown and unknowable profits as long as the state keeps the music playing and nobody has to run screaming for a seat. The widespread preference for a rigged market is stunning. No wonder the US dollar rate and yen are the beneficiaries when a whiff of control and sanity reaches our nostrils. From a historical point of view, the Shanghai is an accident waiting to happen.

And yet the Chinese are very, very good at managing the process. It may look like warp-speed from medieval conditions to modernity, but in fact the Chinese government acts with a lot of restraint, considering the pressure on it. Who is to say they will fail? We would never bet against them. So that is the tense situation—an awful combination of awful conditions but utter faith in the managers. It would seem the

Chinese government has more credibility today than the Fed. We also pay heed to the need to keep up the fiction that all is well. Pride is important, appearances are important. China manged to overcome one giant bubble burst in the Shanghai index and it can overcome a second one, if that is what we get.

We don’t know if this big-picture perspective is correct, but if it is, any safe-haven effect on the dollar from wobbly situations in China are likely to be short-lived. That in turn implies that the rise of the yen has limits, too.

Pounds to US Dollars = 1.6569
Pounds to Euros = 1.1730
Euro to Pounds = 0.8525
Pounds to Australian Dollars = 2.0100

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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