China Dominates the Thanksgiving Table
An Update from World First.
The Pilgrims made seven times more graves than huts. No Americans have been more impoverished than these who, nevertheless, set aside a day of thanksgiving. ~H.U. Westermayer
American families will gather at this Thursday to celebrate Thanksgiving. It’s a time for family, a time of reflection and obviously, a time for giving thanks. The American family have not had much to celebrate over the past 12 months with consumer spending still depressed, house prices continuing to languish near the depths and a whopping health care bill still inching its way through the US Congress.
There is a division in Washington at the moment between the government’s currency talk and the government’s currency walk. The US government and Americans in general like to get behind a rallying symbol; baseball, apple pie, the star spangled banner but recently they had been beating the “strong dollar” drum.
Americans love a strong dollar. It’s a gesture of strength. The division is this: the dollar must stay strong to prevent foreign governments selling the debt that it has been chucking out for years and years. At the last calculation we believe that around 34% of US debt is held by foreign governments with the majority of that being held by the Chinese and Japanese. A significant weakening of the US dollar would see the value of these assets shrink and puts selling pressure on the debt. However a weak dollar would also cut the economy’s reliance on imports, stimulate the export market and, in a country with 10% unemployment, create valuable jobs. Ceteris paribus, you would then see consumer confidence pick up alongside consumer spending and a general improvement in the US economy.
We are still happy with our predictions that we will see dollar weakness over the course of 2009. We may not see the rate of decline that we have seen this year; dollar has weakened by 14% against sterling this year. A similar move from current levels would see GBP/USD at 1.89 in 12 months time but we doubt that the market would allow sterling to appreciate that much through a year that includes a general election.
Obama and Geithner, like Bush and Paulson before them, have a delicate balancing act to consider. It is certainly my opinion that we will not see a revaluation of the Chinese Yuan against the US dollar soon; there is very little incentive for the Chinese government to change the current dynamic.
The Americans will have to obey the golden rule: he who owns the gold, rules.
All this and more is available at www.worldfirst.com/blog.
Trade of the Week
This week’s trade is a risk reversal from January to June. The client sells GBP and buys EUR to pay suppliers in Germany. They had budgeted on the next six months of invoices at a GBPEUR rate of 1.09 on our advice, but were unwilling to use forward contracts to protect themselves as they believed that the pound would rise at some point against the euro.
The client was able to achieve a worst case rate of 1.09 on their option and they benefit up to a rate of 1.18. Should the GBPEUR rate be below 1.09 on expiry they are able to buy euros at 1.09, if it is above 1.09 and below 1.18 they buy in the spot market and if it is above 1.18 they are obligated to buy at 1.18.
This strategy required a premium of 1.4% of the notional amount (the amount hedged), and is also relevant for buyers of sterling and sellers of other currencies. As there is a potential further weakening for sterling in the future, it provides a balanced upside for this potential, while guaranteeing a tight worst case rate.
For more information, see www.WorldFirst.com.