USD

Morgan Stanley Explains How The Yuan Hike Will Lead To More Easy Money In America


Now that China has goaded the yuan-bulls with prospects of a near-term yuan-dollar exchange rate adjustment, it faces the risk of 'perverse' capital inflows according to Morgan Stanley's Manoj Pradhan.

Given that the U.S. and Europe will likely maintain extremely accommodative monetary policies, liquidity created by these regions could end up exacerbating China's capital inflow situation. (As 'AAA liquidity' described below)

Morgan Stanley:
Importing AAA liquidity: Capital flows into China may be exacerbated thanks to an unlikely source the euro area. Sovereign risks from the euro area have probably prompted not just the ECB but also the Fed to stay on hold for longer, keeping the AAA liquidity regime intact. The fast-growing economies of the world, particularly the ones with fixed or relatively stable exchange rates, import this excess liquidity, and China is high up on that list.

Which means more foreign exchange reserves China will probably park in U.S treasuries...

In the near future, more capital inflows, higher reserves and lower yields are the likely outcome. As capital inflows increase, Chinas system of capital and credit controls will probably lead to an increase in the size of its holdings of foreign exchange reserves. We believe that at least some of these reserves are likely to find their way back into bond markets, keeping yields anchored. Despite an extremely volatile period in developed markets, US markets and even euro area markets remain a favored destination thanks to their size and depth.

And thus downward pressure on U.S. long-term interest rates... ie. a bias towards easier money in the U.S. financial system. It looks like the U.S. Federal Reserve can continue to rely on China's currency regime as an easy-money ally. Until the day when the yuan doesn't look like a one-way bet, any prospect of a yuan-dollar adjustment will only attract even more capital, creating more Chinese reserves, and thus more potential demand for U.S. treasuries.

Yes yes we will see a lower value of the USD but also lower values of EUR JPY CAD AUD ( perhaps not GBP) that is called co-devaluation
FX trade reduce to the question which is at the moment a little less dead then the other ?

Something very interesting (at least for me):
http://www.tradercurrencies.com/currency-trading/77819/american-states-on-the-verge-of-system-failure/

Some snippets:

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July 1st marks the tipping point of the Great State Meltdown.

...

For years, 48 states have borrowed too much and spent too much just like the Federal Government. But the key difference is: they cant print their own money to pay the bills.

And to make matters worse BY LAW they must balance their budgets by July 1st.

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So I scratch my head about the impact this could have. I guess this could lead to some Yen strength due to risk aversion?

a fallback or a masterpiece call it as u want
havent u felt it few months ago during the hearing.

lets see the behaviour during a short uncorrelated period

anyway eurusd made me 100 pips so far and i expect more.
Volcker plan...naa Volcker had too good insights in connection of ecnomy and monetary policy.
Not yet. He's fallback joker.