The US House of Representatives last evening passed a bill that would, if it became law, be a game-changer in the global trade scene. It would allow the Department of Commerce to levy countervailing duties (a type of import penalty) based on currency undervaluation. No word yet on how that would be determined. At this point it looks more like a shot across the Chinese bow, bringing a predictable response from those quarters.
Leaving aside for a moment the specifics of this particular piece of legislation, whose passage by the senate may be doubted, let’s step back and take a look at the broader trade picture. We can see several developments over recent weeks. Chief among these is the volatility in the currency markets.
With the Fed essentially announcing that they intend to drive down the US Dollar, it has resumed its fall after a counter-trend rally in August. In Japan the BOJ, with its chief export market devaluing and China buying Yen, has intervened forcefully, but the intervention appears to be overwhelmed.
In Europe, the euro is in its own rally, and has just retraced 50% of its move from the November high to the June low. The Swiss Franc, like the Yen and precious metals, has been driven sharply higher by safe haven buying, and the SNB, like the BOJ, has intervened to little real effect.
In all, we have an atmosphere of trade sanctions, competitive currency devaluations, and distrust. This is not an encouraging development for economic growth, but it does reflect the fact that global trade imbalances have much to do with the current problems, and a sensible solution must have much to do with our prospects going forward.
We’re still awaiting some indication that a sensible solution is forthcoming. The House action is not what we were looking for. With this backdrop, the November G-20 meeting should be quite interesting indeed. For our portfolios, this means a higher probability of increased volatility ahead.
For insight on the Chinese perspective, as usual, we go to Michael Pettis.