Randomly Noted

It wasn’t a good day for Chinese stock markets on Monday. And unless U.S. companies unleash some positive earnings news on Tuesday, stock markets in the U.S. could be under pressure as well.

The Shanghai Composite Index closed down 3.0% while the Shenzhen Composite Index fell 4.3%. Both were reacting to Friday’s news from the People’s Bank of China, which said it will raise the share of deposits that banks must keep on reserve by half a percentage point. this is the seventh time in a year the bank has done so and follows two interest-rate hikes since October.

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The most interesting phrase in the surprisingly combative speech delivered in Frankfurt by Federal Reserve Chairman Ben Bernanke is “incomplete adjustment.”

More fully, the overly polite but still stinging quote is this, from the text of his speech at a European Central Bank conference: “An important driver of the rapid capital inflows in some emerging markets is incomplete adjustment of exchange rates in these economies, which leads investors to anticipate additional returns arising from expexcted exchange rate appreciation.”

It’s all awfully important, but the back-and-forth between the Fed and its critics, domestic and international, of quantitative easing is starting to resmeble two children standing in front of a neighbor’s broken window.

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To no one’s surprise, The U.S. Treasury passed today on the opportunity to brand China a manipulator of its currency.

That was done as a way to avoid for now an artificial exercise imposed by law.

More telling, in the real world of hardball negotiations, the broad recent decline in the U.S. dollar’s value against many currencies could well give the U.S. less heft as it tries to jawbone Chinese leadership into submission on the yuan.

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It’s war!

War is a pretty strong word and one not often used in financial reporting. But there it is, over and over, the word war used in direct quotes and out of them. It’s the operative term to describe what is going on in currency markets.

We might be short of war, but clearly things have changed. Just today, the rhetorical level aimed at China’s mostly unchanging yuan is higher than before. And it’s been pretty high.

The U.S. Treasury Secretary, Timothy Geithner, still employs non-threatening words and won’t use China’s name. But, still… “When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same, and this sets off a dangerous dynamic,” Geithner said.

A Dow Jones Newswires headline this afternoon reads, “EU President: Europe Demands China Budge On Currency,” implying the comments earlier today of Chinese Premier Wen Jiabao in Brussels, in which he implored Europe’s leaders not to “join the chorus pressing to revalue the yuan,” fell on deaf ears.

Japan has intervened and the country’s central bank will launch more quantitative easing. The currency is still strong against the dollar. Chile has publicly worried about its too-high currency, as has Brazil.

Meanwhile, in the U.S., markets are reacting as if it is a signed-and-delivered deal that the U.S. Federal Reserve will embark on more quantitative easing of its own, knocking more starch from the weakened dollar. A distressing September jobs report, due for release on Friday, might be the final catalyst.

The world’s major nations have done a solid job since the start of the credit crisis and subsequent broad and deep recession of avoiding significant protectionist trade measures. It would be disappointing indeed to mitigate that necessary success with a no-holds-barred fight to gain advantage through weaker exchange rates.

It might not be up to China to stop all this, but some real rather than apparent relaxation of controls on the yuan by the Chinese government surely would help calm things down.

For the U.S. Treasury Secretary, there are probably no fun days and less fun days. Maybe history will look more kindly, but it’s tough sledding right now.

Today was likely one of those less-fun days for Treasury Secretary Timothy Geithner. He had to appear before angry committees of the Senate and House of Representatives and tell them why retaliatory measures against China for controlling its currency are not the way to go.

Today must have been as much fun for Geithner as heading to Capitol Hill to defend the big bank bailouts. Actually today was probably less fun. Because there are defenses of bank and AIG bailouts, however unpopular they have become from a rear view mirror view.

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Two interesting things happened Thursday in the all-important economic relationship between the U.S. and China.

China proactively informed the world that its significant holdings of U.S. Treasurys did not constitute a “threat” to the U.S. Later on, the U.S. Treasury secretary declared in a required semi-annual report that China is not a currency manipulator.

Ah, diplomacy.

Not to imply that these events were or needed to be coordinated. They did not need to be. They are simply examples of the leaders of the established and emerging economic superpowers understanding their mutual dependence and seeing no need at this time to publicly antagonize each other.

The ‘at this time’ phrase is important. Even if China’s State Administration of Foreign Exchange said, as it did Thursday, that U.S. government debt is an important ingredient for China’s foreign reserves and not a threat hanging over the indebted U.S. government, such large holdings do constitute leverage China has over the U.S. economy and government.

It could be leverage that is never overtly acted upon. If China ever did dump a big portuon of its Treasurys in a precipitous way it would be an act of mutual and even global economic damage on many levels.

So it pays for everyone to understand that potential for mutual destruction.

As for the currency report to Congress, Treasury Secretary  Timothy Geithner had already pulled off a deft and nuanced move by announcing in April that the report would be delayed. Then in June, China said it would return to a currency policy that’s more flexible and more susceptible to market influences.That made it safe for Thursday’s report on non-manipulation to be released.

Besides points for subtly, who wins from this careful dance?

Both sides benefit just by avoiding more overt conflict, which could depress trade and economic growth in both nations. Whether China winds up with more depends on how far the June announced relaxation goes to revaluing the yuan upwards.

There are reasons to be skeptical about China’s enthusiasm for a bold move, though Treasury maintained in its Thursday report that a yuan of higher value would help in China’s shift to more domestic consumption from exports and free up the central bank to better fight inflation.

As was true when China first announced its policy, Geithner said the real test is still awaited. “What matters is how far and how fast the renminbi (yuan) appreciates.”

Not too far, nor too fast, is the most likely scenario.

One of the reasons the Euro was weaker versus the dollar on Wednesday was concern and rumors that the Chinese government, a huge global investor,  had decided to stop buying sovereign debt of European governments. In other words, they didn’t want to be exposed to potential losses that could arise if Spain or other countries couldn’t get their financial houses in order.

So, here’s the what the Chinese said, according to a Dow Jones Newswires report:

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The problem for financial markets when it comes to North Korea is knowing when things have gone from bad to nuclear.

All too often we have witnessed an episode of barb-throwing between the North and South, accompanied by any number of threatening or retaliatory measures: Withdrawal of aid, testing of missiles, testing of nuclear weapons, border skirmishes and such.

Over the decades that Pyongyang and Seoul have remained in limbo from a war that never officially ended, one feels we’ve seen it all.

That makes this week’s events sound a bit like the boy who called wolf.

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The Aussie dollar is falling sharply. It must be time to buy.
In the great currency smackdown of recent days, the Australian dollar has copped some of the worst of it. Partly because it was trading above where it should, but also because it is a key “risk” currency that tends to shine when the general market mood is better and investors are willing to enter carry trades to get yield.

The currency has fallen against the U.S. dollar and the Japanese yen in particular, and even the Kiwi dollar, against which it normally commands a healthy premium. It is now down near US$0.8316, from around US$0.9260 only three weeks ago.

This column has argued before that the Australian dollar was overvalued. Certainly there was never a justification for it to go to parity.

Some of the factors underpinning its previously-lofty levels look less certain. China in particular has been the big shining light for Australia, buying up its raw materials and helping in no small measure to lift the Australian economy quickly from its slump, but there is the likelihood that China’s growth slows.

The Aussie until recently also benefited from a fairly protracted period of market calm; better stock markets equate to gains for riskier currencies. That has all changed.

Plus the rapid interest rate hikes from the country’s central bank have put it ahead of the curve in terms of yield appeal. Consider what you can get for your money in Australia, compared to the smaller return available in Japan or the U.S.

That’s why the Aussie was set up to fall hard. And fall it has. But the declines should probably be close to done.

The pace of the drop should have washed out a good amount of long positions. The currency has come back to more realistic levels. The reasons to like the Aussie–and there are a fair few–should become more apparent soon.

There should be some serious questions asked if the currency were to push much under the 80 U.S. cent mark; certainly the still-solid economy doesn’t justify such a drop. It would amount to cruel and unusual punishment for a currency that was overpriced for a while but has already corrected to a more reasonable setting.

Survey the landscape–what else is there to buy? The euro? The Thai baht? An already-stronger U.S. dollar?

Given the fairly unexciting alternatives, and the fact the Aussie economy is still in much better shape than elsewhere and rates are higher, there are liable to be some supporters. If the fall continues at a similar pace, one of those supporters could be the Reserve Bank of Australia, which rarely enters the market but may do so to restore order.

(This is a Money Talks column that first ran on Dow Jones Newswires)

Beijing has been pretty quiet on the declining euro, and with good reason.

There’s been some chatter in markets that central banks, including the big names in Asia, are starting to fret about the euro’s decline, and even offloading some holdings.  We may never know for sure. But there’s certainly no great impetus for the People’s Bank of China – our champion of reserve diversification in Asia – to rush euros onto the market.

Not that long ago China was warning the U.S. about a deterioration in the U.S. dollar, reminding the world it had a vested interest in the dollar’s value via its massive holdings of U.S. government debt.  The greenback’s recovery courtesy of the euro’s fall has eased those concerns. China is sitting prettier on its U.S. assets.

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