The two issues on the currency front this year are whether China will finally increase the value of the renminbi significantly and how the U.S. dollar, the euro and Japan\u2019s yen will move.
The only thing that could persuade the Chinese authorities to appreciate the renminbi is the development of a domestic inflation problem so serious that they see currency appreciation as part of the solution. St\u00e9phane Marion, chief economist and strategist with National Bank Financial Ltd. <\/b>in Montreal, and David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. <\/b>in Toronto, believe that this will happen, with the renminbi appreciating by 5%-10% this year.
If Marion and Rosenberg are correct in their view that inflation is becoming embedded in China through wage increases, appreciating the renminbi is the most efficient way to deal with the problem. It would lower demand for Chinese-made goods, whether exported or consumed at home, and thereby lower wage demand pressures.
However, if inflation can be controlled more easily, China will continue its policy of increasing the renminbi by only 1%-3% a year. China favours this gradualist pace because it doesn\u2019t bring the risk of social unrest that a higher increase could unleash by dampening export growth and thus increasing unemployment among the hundreds of thousands of people moving each month to the cities from the country.
Continued gradualism will infuriate the U.S., which believes that China \u2014by keeping the renminbi very low \u2014 is forcing the U.S. to subsidize Chinese employment. The U.S. believes that if the renminbi was at a fair level, Americans wouldn\u2019t be tempted to buy as many Chinese goods; the resulting greater sales of U.S.-made goods would create many more U.S. jobs.
Unfortunately, the U.S. is not in a strong position to impose its will. The Bank of China holds almost US$3 trillion in US$ reserves and could cause severe problems for the U.S., possibly including a run on the US$, if it started unloading those reserves.
Nevertheless, there is some risk that the U.S. will try to force China\u2019s hand by initiating a currency and trade war. Jean-Guy Desjardins, chairman, CEO and chief investment officer of Fiera Sceptre Inc. <\/b> in Montreal, for example, puts the odds of this possibility at 30%-40% in the absence of significant renminbi appreciation.
In the meantime, other currencies will be moving around, although not necessarily in a consistent direction. The major industrialized countries want their currencies to depreciate against the renminbi and other Asian currencies because that will increase their exports to that booming region. But if that depreciation doesn\u2019t occur, they will try to depreciate their currencies against each other because that situation will at least increase their exports to each other.
Of course, this strategy can\u2019t be successful for all. Jurrien Timmer, portfolio manager and director of investment research with Fidelity Management & Research Co. <\/b> in Boston, calls this \u201ca race to the bottom.\u201d He suggests the U.S. would emerge the winner because the U.S. Federal Reserve Board\u2019s mandate includes economic growth, which means it can keep interest rates lower and for longer periods than the European Central Bank, which is solely focused on inflation and thus has to respond whenever upward price pressures appear.
Because of this conviction, Timmer is investing a chunk of his fixed-income allocation in currencies. He also favours Canadian, Australian and Brazilian stocks because of their strong currencies.
Timmer\u2019s expectation that most resources-based economies\u2019 stocks will remain strong is shared by most economists. And most also agree with Timmer that the US$ is on a long-term downward path.
But some think the greenback could strengthen this year if U.S. economic growth is stronger than expected. In addition, there are likely to be bouts of downward pressure on the euro as concerns about sovereign debt problems rise and fall.
The hope is that these problems will continue to be considered an internal European problem and not spook currency markets generally.\tIE<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"
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