A cold windblew in China’s direction from the US House of Representatives last night. TheHouse voted yesterday on a bill put forth by the Ways and Means Committee whichdubbed China a “currency manipulator.” The name-calling is not new but the gutsto say it out loud is. The watered down version, called the Ryan Murphy bill,that passed the House vote is legislation that would allow the US to imposetariffs on imports based on estimates of currency undervaluation. Its intentionis to punish China for not allowing its currency to rise in accordance withnatural market forces, although the language is broad enough to apply to otherAsian countries.

So, in thecurrency markets we have a brewing an international war, as pointed out byBrazilian PM, Guido Mantega. It’s a race to devalue, which not everyone can winat once because currencies, unlike any other asset, are valued solely based oneach other, making it impossible for them all to fall. They affect other assetprices for sure but as a market they stand alone.

The problemscaused for the US export and manufacturing businesses by China’s currencymanipulation are not new but they are exacerbated by movements to do the sameby Taiwan, Brazil, South Korea, and most importantly, Japan, who recentlydumped Yen to buy $20B. The chatter surrounding the Murphy bill today is allabout how we went about this in the wrong way and this will cause tradetensions and ultimately hurt ourselves by making Chinese goods more expensive.The other side of the coin, however, is that we kind of don’t really have achoice. If other central banks are now coming to the table to fight we have totake aim at the perp who does the most harm.

The bill muststill pass through the Senate, which is not likely to happen before mid-termsand the market is not pricing in trade tensions but if it does pass and thepenalties come to fruition, there is the possibility we can at least expectsome form of retaliation by China. This usually entails some kind of threat to changethe balance sheet levels of dollar-denominated assets.

The US,Japan, and GB are likely to orchestrate more direct currency intervention or wewill see the value of our currencies depressed as a result of furtherquantitative easing. If other central banks take either of these tacts itincreases the likelihood of the latter happening in the US at the next meeting.

The brewing concernabout currency manipulation is likely to me the main topic at the IMF/WorldBank Fall meeting next weekend. The G7/G20 finance ministers and centralbankers will have an opportunity to meet there. This comes after the Bank ofJapan meets on Monday and Tuesday, the Bank of England meets on Wednesday andThursday, and the ECB makes post-meeting comments on Thursday as well.  

The G-20Summit is in Korea November 11-12. We’ll see if they come to some sort ofcompromise.

We have a bigweek for data coming up. Non-Farm Payrolls, for which we got the last batch ofSeptember data this morning (Initial unemployment claims dropped 16K to 453K, alarger than expected drop), are the most watched but leading up to Friday’snumber we have other employment-related data, ISM Non-Manufacturing Index,Factory Orders, and Wholesale Inventories, post-employment. Sorry no chartstoday. Stay tuned.

Wait, now Rahm Emanuel is resigning too? I was still thinking about how much I was going to miss Larry Summers...

WSJ: Blaming China Won’t Help the Economy

ByANATOLE KALETSKY

Published: September 26, 2010

http://www.nytimes.com/2010/09/27/opinion/27kaletsky.html?_r=1&scp=1&sq=blaming%20china&st=cse

FT: Currency wars

By James Mackintosh

Published: September 28 2010 22:43 | Last updated: September 282010 22:43

http://www.ft.com/cms/s/0/7610475e-cb45-11df-95c0-00144feab49a.html

FT: Intervention: The genie hasescaped from the bottle

By Peter Garnham

Published: September 27 2010 17:38 | Last updated: September 272010 17:38

http://www.ft.com/cms/s/0/50ea3302-c9c6-11df-b3d6-00144feab49a.html