In the past I have criticized the CNBC tagline, “Live From The Most Powerful City In the World, New York.” I find it arrogant and devoid of any perspective. What makes a city powerful? In some sense I suppose it’s the ability to make and shape events around the globe. Wall Street may be a powerful money center but so is London and from a political and monetary sense Beijing has catapulted itself a spot among the most influential. Friday morning I did an interview with Gordon Long of the Financial Repression Authority, a must visit site for its archive of discussions on global macro issues. We were discussing the role of China in affecting U.S. monetary policy. Gordon Long has discussed the idea of an agreement reached in February at the G-20 meeting in Shanghai about an ACCORD to keep the U.S. dollar stable to weak in an effort to prevent the Chinese from actively pursuing a weaker YUAN for when the DOLLAR RALLIES THE YUAN IS ALSO PUSHED HIGHER AGAINST A BASKET OF DEVELOPED MARKET CURRENCIES AND CERTAINLY AGAINST OTHER EMERGING MARKET FX.
There is a THEORY that the Chinese promised not to rattle the markets with a sharp devaluation of the YUAN and the FED would hold interest rates so as not to put downward pressure on the Japanese YEN or other emerging market currencies. Many market participants believe this is the basis for the Shanghai Accord. John Brady of O’Brien and Associates has been quoted in many financial media publications noting the importance of the YEN/YUAN cross rate as having an increased importance because of the Accord. Think back to August 2015 when the Chinese surprised the markets with a MERE 3% devaluation and the turmoil that followed into late August and September. China sent a message to the world that the global markets are too fragile to entertain a serious sea change from Beijing.
The FED did raise rates in December and for the following six weeks the DOLLAR rallied versus all currencies, including the YUAN, but after the late February meeting the DOLLAR has fallen and the FED has not raised rates. Is Yellen holding the line because the Chinese threatened to meet any FED rate rise with a devaluation of the YUAN? This is the basis of the conjecture of an accord. If such an agreement was made the market would know because secrets tend to leak through the press leaks from dissatisfied parties. As I discussed with Gordon Long, such an agreement would not be reminiscent of the Plaza Accord but more in line with the U.S. Treasury’s actions in June 1998.
In 1998, President Bill Clinton was headed to Beijing when the U.S. Treasury announced it was intervening to BUY YEN against the DOLLAR. This unilateral intervention from the Treasury came right after Secretary Robert Rubin had delivered a speech proclaiming the importance of the U.S.’s strong dollar policy. As President Clinton was going to Beijing to set in motion trade deals and the opening up of Chinese markets to American technology, the Japanese yen had just experienced a year in which it had depreciated over 20% amid the proliferation of the CARRY TRADE, which resulted in many financial market actors shorting the YEN in an effort to attain higher returns in other global markets. The U.S. Treasury intervention caught many of the world’s most successful hedge funds short and led to huge losses. The intervention was sustained during the next few months. The Japanese were also caught off by the unilateral Treasury action and the Japanese government was very bothered that President Clinton did not stop in Tokyo on his Asian trip.
It appears that the U.S. is seeking to placate China again and avoid the potential financial disruption from a unilateral move by the authorities in Beijing. There has been a great deal of rhetoric form Secretary Jack Lew directed at the Japanese over MOF/BOJ efforts to weaken the yen. A major move in the middle of the BREXIT vote would certainly cause the British to favor an exit as the world would be forced to respond to any severe drop in global equity markets. If Japan moves to weaken the YEN the Chinese will certainly respond, but does this also tie the hands of the FED? This brings us to the G-7 meeting with the heads of state. The entire basis of the outcome will be quid pro-quos.
In tomorrow’s Financial Times, Gavyn Davies seem to be raising the same point about the FED and its global role in his article, “Reluctant Partners:The Fed and the Global Economy.” Davies entertains the notion of the FED being an isolationist and setting policy by what its mandate calls for: employment and inflation. Volcker and Greenspan could operate believing that if the U.S. economy was in order it would be beneficial for the entire globe. But the world has certainly changed as China has become a major part of the world economy and the U.S. percentage of global GDP continues to shrink on a relative basis. There is a battle between the FED and domestic money manager versus its role in the politics of a global community. This is what will play out in Japan this week as the world leaders of the G-7 nations try to contain the disruptive influence of a Politburo in Beijing, struggling to find its economic balance.
The Gavyn Davies article cites the work from economist Barry Eichengreen:
“As the U.S. economy grows more open and the rest of the world grows larger, international considerations …will impinge more directly on the central bank’s key objectives of price and economic stability. The Fed will have no choice but to incorporate those considerations more prominently into its policy decisions.”
There is a great deal of dissonance within the FED when it comes to entertaining the global headwinds. The outcome will play out in the G-7 communique as David Cameron and Prime Minister Abe both seek some relief from possible GLOBAL DISRUPTIONS. Brexit will be discussed as will Japanese demands for a global fiscal stimulus agenda. China won’t be in attendance but its presence will most certainly be felt. It seems like June 1998 all over again.