X-change Rate, why is it so?

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cipher's picture
cipher
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Joined: Jun 19 2009
Posts: 51
X-change Rate, why is it so?

Hi all,

I was looking through the conversion rates of USD vs other currencies, I noticed a downward trend when USD was base currency vs. most of the other currencies:

USD_vs_CAD

USD_vs_CAD

USD vs. EURO:

USD vs. Indian Rupee:

EXCEPT

USD vs. Chinese Yuan:

Why is this flat?

Does it just show that Chinese are balancing their currency too often or does it mean that no-one is ready to give more yuan for a dollar?

Comments appreciated.

Thanks
mayankpj

 

goes211's picture
goes211
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Posts: 1114
Re: X-change Rate, why is it so?

The Chinese Yuan is not a freely floating currency.  The Chinese government believes it is in their own best interest to keep the yuan pegged to the dollar and I believe that currency controls keep the large financial players from being able to force the Chinese government from de-pegging.  This clearly will not last forever and will also keep the yuan from ever being considered as a reserve currency.

cipher's picture
cipher
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Posts: 51
Re: X-change Rate, why is it so?

Thanks for the reply.

If they have their currency pegged to dollar then why did they want to ask US to pay the debt back to them in Yuan?

Is it reasonable to conclude then, that China is trying to allow their currency to float freely, but is trying to preserve the value of its US assets first?

mayankpj

Farmer Brown's picture
Farmer Brown
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Posts: 1503
Re: X-change Rate, why is it so?

When two currencies are freely tradable, trade must balance, eventually.

To illustrate, imagine Country A and Country B each using Currency A and Currency B.  

First of all, in order for any trade to be able to occur at all, there must be banks in each country willing and able to conduct currency swaps.  This means a bank in Country A, for example, must hold surplus Country A currency units and be willing and able to exchange them with a bank a Country B with surplus B Currency Units.  This allows traders in each country to exchange goods for the other country's currency. 

In the first "trade-cycle" be it a year, or whatever unit of time you want, let's suppose Country A runs a deficit with Country B.  That means Country B winds up with some surplus Country A currency units, and Country A winds up with zero Country B units, and a shortage of its own, Country A units.

Country A now has less of its own currency, while Country B has all of its own currency, and a little extra of Country A's. 

Going into the next trade cycle, again - choose a time window - Country B will be extracting goods from Country A, but this time, it will already own some of Country A's currency.  This means there will be no need to exchange currencies.  In the meantime, Country A will not only not own any of Country B's currency, but it will also be running a shortage of its own currency, since Country B gained some of it in the first cycle.

Prices:  The effect on prices is key and the whole moral of the story.  Since Country B is running an excess of Country A's currency, Country A's prices will be effectively lower in Country B's terms than the first cycle.  Alternatively, Country B's prices, in Country A's terms, will be effectively higher in Country A's terms.  This means Country B will be able to afford more imports from Country A than the first go-around, and the opposite will be true for Country A.  

In the end, this means B will import more from A in the second cycle than it did in the first, and A will import less from B than it did in the first.  Together, these exchanges of productivity, measured in arbitrary currency units, must average out, after enough time, to an exchange rate between the two currencies that results in a equal exchange of actual productivity, at which point the exchange rate reaches equilibrium.  That is not to be confused with equality.  One unit of B could easily be worth 10 of A's.  The point is, if neither country devalues its own currency and productivity stays constant, the exchange rate will hold steady.

When one country enforces a "currency peg", it violates what would be the natural progression of prices and exchange rates.  It results in one country's productivity being consistently undervalued while absorbing the currency of the other trade partner.  

Normally, with countries not using fiat money, but real money, this would not be sustainable since there could be no "forced pegging".  But, with the advent of worldwide fiat money oligopolies, this can and has been done and will continue.

cipher's picture
cipher
Status: Bronze Member (Offline)
Joined: Jun 19 2009
Posts: 51
Re: X-change Rate, why is it so?

Thanks FB for explanation.

From what you said, I conclude that all this time , China has been undervaluing their currency by pegging it at roughly 6.8 : 1 against USD. (So that their goods can sell cheaper in US).

They have been using USD in turn to import goods needed by them all this long and have also been saving a lot of it.    If their intention was to continue printing more Yuan and maintain the peg, then nothing should change for them.

But they are asking to be paid back in Yuan (instead of USD) for the US debt they hold. Why?

I suspect that they do not want to continue pegging their currency to USD, I am wondering if this is right or if there may be other reasons to this. Is it that they believe USD will be undervalued a lot in coming years (or months).

mayankpj

 

goes211's picture
goes211
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Posts: 1114
Re: X-change Rate, why is it so?

But they are asking to be paid back in Yuan (instead of USD) for the US debt they hold. Why?

Because they are starting to question the current arrangement.  China sends us real production ( usually cheap consumer goods but they are slowly moving more up the scale ) and they receive back little green pieces of paper.  This deal works as long as those little green pieces of paper retain their purchasing power.  What they and may others now see it that the only way that the US can cover its obligations is to inflate its currency or actually default on its debt.

The current system has only continued on its unstustainable path because the USD was considered the worlds reserve currency.  It is a great priviledge to have your debt denominated in your own currency.  We are on the brink of losing this priviledge and when that happens, the American lifestyle will take a big hit.

They might wish they could covert their current debt to yuan but I don't think there is any way they can make that happen.  What they can do is refuse to do any more trades in dollars and therefore force all future imbalances to be denominated in yuan.

 

 

 

cipher's picture
cipher
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Posts: 51
Re: X-change Rate, why is it so?
goes211 wrote:

They might wish they could covert their current debt to yuan but I don't think there is any way they can make that happen.  What they can do is refuse to do any more trades in dollars and therefore force all future imbalances to be denominated in yuan.

One of the reasons that keeps chinese from being demanding is that they are dependent on US as market for their goods and for the green pieces. I believe that as soon, as they realize that USA can no longer serve as a market to their goods (because as you pointed out , dollar would loose its value, and Energy is another hindering factor to Int'l Trade) then they would not have any incentive to trade with US.

I believe that US probably has only one leverage at this time against Chinese demands, i.e. serving as market to chinese economy. If this relationship ends now, then it would hurt chinese economy as well.

I think that soon Chinese would have high position in dictating terms over USA (if and when US economy goes down) unless something exceptional happens!

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: X-change Rate, why is it so?

Read Hugh Hendry's piece (just posted by JAG on the DD).  

If he is right, China is as the US approaching 1929.  Huge, leveraged, overcapacity - asset bubbles - government intervention (of the lousy kind).

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