The dragon still all show!

Review of the Forex market prospects MaBico 14-18.11.04

Perhaps, for the first time the presidency of Alan Greenspan at the Fed, he openly spoke of the number one issue today for all market participants - a growing problem threatening the current account deficit the United States. Recall that on this issue even in spring 2002, warned the International Monetary Fund. Then the representatives of the IMF publicly stated that bloat the deficit threatens not only the attractiveness of U.S. assets outside the U.S., but also the potential for rapid devaluation of American currency.

Note that, despite the fact that Greenspan did not see at present no sign of reducing demand for U.S. assets, however, he fairly warned about the possible limits of the desire of foreigners to buy American assets, and maintain a growing current account deficit the United States. For all his caution statement, analyst summarized his statement as support for a unified policy of the White House against the dollar to reduce deficits in the current 5,5-6% to 3% of GDP.

In addition, a new intrigue to the situation around the exchange ratios of major currencies are making rumors about the upcoming revaluation of the Chinese yuan. In case this is happens, it will lead not only to major changes in the currency market, but also to new figures on the U.S. balance of trade with China, as well as between the U.S. and Europe and, of course, between Europe and China.
As the world political pressure on China is growing, and artificially low rate of Chinese yuan, made Chinese exports cheaper, leading to the apparent excesses of trade balance of China with Europe and the U.S. decision to depart from the policies of China's leaders rigid attachment yuan to the dollar is seen more and more real.

In connection with this interesting view of some experts. For example, Frank Gong, chief China economist at JPMorgan, believes that "the revaluation of the yuan is needed to mitigate the effects of the influx of billions of dollars of capital into the country." He also notes that "even if inflation falls to 3%, the annual interest rate on deposits to 2.25% will still be in negative territory."

As a result, he predicts that "they are going to stick to current policies, but probably in the next 6 months, even several times the rate will increase - by 70 bp. Citibank And experts believe that "in order to eliminate economic imbalances, it is necessary to further increase rates, as well as the revaluation of the currency. Inflationary pressure is large."

"We'll go to the free exchange rate, given current realities. I think it will need a couple years - said Li Ruogu, Governor of NRB. "We do not have any schedules or time frames." "We are closely watching the development of world economy and monetary policy of central banks of leading economic countries."

As a result, experts believe that this process may begin with a small expansion of the range of fluctuations in the yuan, only then will the RMB is pegged to a basket of currencies. China is now beginning to take a broad
range of actions, the first step - raising rates, then wait for the expansion of the range, analysts believe.
In its report for the quarter NRB 3 reiterated its position that the rate of the RMB should be stable and to be on "a rational and balanced level."

We are now in more detail the situation with regard to the issue yuan, as the exchange ratio between Asian, on the one hand and European and U.S. currencies, and could change dramatically.
Well, change the attitude of market participants to the U.S. currency only consistent actions of the administration of President Bush to reduce the budget deficit in the U.S..

In our opinion, very accurately described the current situation, Michael Klavitter, currency strategist at WestLB. He said that would be quite difficult to change negative attitudes towards the U.S. until not a sign that the U.S. administration really plans to reduce the budget deficit. He also recalled that in previous decades, the negative trend of the dollar should end as soon as the data on foreign trade began to show a sustained reduction of trade deficit the United States.
As a result, only 3-5 months, sustained reduction in the deficit rise to talk of a trend towards improvement of the indicator, and the descending trend of the dollar spread itself without any intervention and interference. So, the fundamental backdrop continues to be, a further downward movement of the dollar against all major currencies. Perhaps, one can only exclude the likelihood of a correction, which then trigger the opening of an even larger number of short positions on the dollar.

Financial Analyst
Rinat Mescherov
For Forex Magazine