Albert Edwards on the US currency and China

In the last post at Credit Writedowns Pro on jobs, I promised to talk about currency issues but I didn’t! here are two issues then: the increasing current account surplus in Germany and the strong dollar’s effect on China.

On Germany, it’s notable that merchandise trade as a share of GDP in Germany was 70.8% for the years 2010-2014 according to World Bank data. And Germany exports far more than it imports. With GDP at about $3 3/4 trillion USD, its trade surplus of $285 billion USD is 7.6% of GDP. That’s a huge imbalance for a large economy that has the EC concerned. Germany is benefitting from a weak euro and the euro weakened further on the US jobs report data, sending it at points below $1.09 per euro. The biggest beneficiary of a weak euro is Germany, simply because its trade surplus is so large and its economy is also large. We should expect then that Germany benefits the most in the eurozone from a strong dollar and Fed tightening. Greece, which is not an export powerhouse will not benefit.

On China, Albert Edwards has the goods. Here’s what he’s saying:

I will repeat what I wrote in January at Credit Writedowns Pro: “Could the euro go to parity with the U.S. dollar? I think yes. The strong dollar trade has become crowded. However, if the U.S. continues on this divergent path we are going to get reflexivity and overshoot versus the Canadian Dollar, the Euro, and emerging market currencies. China cannot possibly hold its peg to the U.S. dollar under that circumstance. And they will be forced to widen their band and attempt to force depreciation. When China joins the currency wars, it will export deflation and change the whole tenor of the discussion.”

What China does in the face of a strong dollar and its own deflationary forces is going to be a big deal.