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Daily Forex
Commentary
By Jack Crooks
Key
News
China, worried about surging
property prices it has failed to cool, is taking
further steps to avoid a speculative bubble that
could pose risks to the economy and its fragile
banks. (The Standard)
UK house prices rose by
0.5% in March, according to Halifax, reversing the
0.5% fall seen in February. (BBC)
Key
Reports due Tuesday (WSJ)
7:45am: ICSC-UBS
store sales index for the week of April 2.
Previous: -1.0%.
8:55am: Redbook retail sales
index for the week of April 2. Previous:
-0.7%.
10am: March ISM non-manufacturing
business index. Previous: 59.8.
5pm: ABC/Money
consumer confidence for the week of April 2.
Previous: -13.
Quotable
"Four
legs good, two legs bad."
- George Orwell,
Animal Farm
FX Trading
Many still can't believe the dollar is
actually heading higher. The gist of the argument
is primarily based on dollar ownership overseas:
"Well, the dollar may be bouncing, but because
foreigners control so many dollars ...blah, blah,
blah ... it can't last." And of course, let us not
forget "the deficits".
Maybe that argument
will prove correct - but I don't think it will.
Why? Two general points:
1) There is still no
viable alternative. The euro was supposed to be
the next big dollar challenger. But does your
average central bank foreign exchange reserve
manager want to load up on a currency where the
underlying structure is increasingly seen for what
it is - smoke and mirrors? It seems that
individuals in Europe still have nationalistic
tendencies and an interest in sovereignty after
all - despite the protests from the wine and
croissants crowd in Brussels. Still, despite all
the killing of innocent trees to produce all those
lovely reports on union, it seems the economic and
political union in Europe is still out of sync.
2) The darling of the dollar-hating crowd -
China - could be in for a hard landing. Most of
the financial press trips over themselves to write
glowing reports on China. (Access is a wonderful
thing.) You would think China world hegemony is
just around the corner. Despite my being wrong so
far (I can play the broken clock investment timing
game too), I still believe a hard landing is in
the cards for China. Again, the politics and
economics aren't aligned as closely as the Chinese
masters would have us believe.
The
Standard of Hong Kong carried a story suggesting
Chinese policymakers are again looking for ways to
slow down the property boom. Two reasons: one is a
financial bubble, and the other is growing social
unrest by a majority of the population that cannot
afford anything now being built. But the property
boom is the golden goose, so policymakers must be
careful.
"China has been here before, and
not too long ago. A property bubble burst in
mid-1990s, leaving banks with much of their
current bad-loan burden of US$200 billion [HK$1.56
trillion]," said The Standard.
Joe
Studwell, editor-in-chief of the China Economic
Quarterly, in a story carried in the Financial
Times, "China's boom has led to only partial
change," seems to agree with The Standard, we have
seen this all before:
The case for "changing China" is
considerable, but cannot be separated from the
financial story of a state that exercises a
vice-like grip on banks, stock markets and bond
issuance. Unfortunately, the most extreme
statistical series in this latest period is not
about trade or ownership but loans outstanding
in the financial system. In just three years
from 2002 to 2004, loans increased by 58%, or
$785 billion. In 2003, new lending equaled
almost one quarter of gross domestic product.
This latest boom was driven by a credit binge.
It was not supposed to happen. As an indicator,
a 10% non-performance rate on new loans by the
16 biggest banks in 2002-2004 bounces the NPL
[non-performing loans] ratio back up to 20%.
There is reason to expect worse. Last October,
the China Banking Regulatory Commission conceded
that the default rate on $22 billion of car
loans extended since 2002 already exceeded 50%.
The AMCs [asset management companies] have
become dumping grounds not just for commercial
bank NPLs but also for the "assets" of failed
investment conglomerates, securities businesses
and government infrastructure projects. The
state makes the AMCs issue interest-bearing
bonds for which it refuses to accept explicit
liability. Separately, Beijing has raided tens
of billions of dollars of foreign exchange
reserves to shore up banks' capital.
The China Construction Bank was supposed to be
the shining star of the Chinese financial system.
It was to be listed as a Western-styled
institution. But there was a little problem with
its chairman being locked up on corruption
charges.
Writes Studwell: "A new paradigm?
The big picture in 2005 is that China's economy
has been incrementally, but not fundamentally,
altered by this latest cycle. In China it is, in
sum, business as usual."
So for those
believing the US dollar is rallying on only smoke
and mirrors or some type of government conspiracy,
I think it makes some sense to consider it may be
because the alternatives aren't all they were
cracked up to be.
Jack Crooks has actively traded in global equity,
fixed income, commodity, and currency markets for more than 20 years. He is
president of Black Swan Capital, a currency and commodities market advisory
firm - BlackSwanTrading.com
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