China has been letting its currency appreciate a little bit lately. This from Brad Setser’s blog…
In his most recent post, Mr. Pettis notes that the RMB’s pace of appreciation picked up last week. That’s true, but the rapid appreciation last week came after an extended period when the RMB was stuck at 7.5 even as the dollar was falling.
China basically sat out the dollar’s fall in September and October — or rather, it opted to follow the dollar down v. host of currencies. A bit of appreciation against the dollar just undoes some of the RMB’s recent depreciation against the euro.
More importantly, as Mr. Pettis notes, expectations of RMB appreciation have picked up. If the market is right and the RMB appreciates by 7% over the next year, simple Chinese bank deposits look mighty attractive.
This is something to watch. China may decided that faster appreciation may be just the ticket to deal with its fuel problems. After all, if the RMB can buy more dollars it can also buy more oil. I don’t think 7% is enough to greatly help though. But if oil prices keep going up in dollar terms, it may encourage them to increase the pace of appreciation.
This would increase the pressure on the dollar (because China would not be supporting it as heavily) and would raise the price of US imports. This would increase US inflation.
In other news, Citi bank has confessed that they have lost between $8 billion to $11 billion more than originally confessed to. They also got rid of their CEO. Calculated Risk had this to say about the Citi press release…
The press release is stunning – this could just be the beginning of the write downs! They claim they will be able to maintain their dividend – I doubt it.
These losses are very dependent on house prices – “fair value of these super senior exposures is based on estimates about, among other things, future housing prices” – I’d love to see their estimate of future price declines (they are probably too optimistic.)
What happens if one of those many Citi pier loans goes bad? Ouch.
If the markets share Calculated Risk’s reaction, this could be an interesting week on Wall Street. One thing that ought to worry anyone with enough sense to keep their heart beating is the fact that Citi still seems to have no clue of what their losses are going be. Either that or they are lying through their teeth. I suspect that it is some of both.
And while all this is all very interesting, the world does not solely revolve around American and its economic issues. Things like politics and religion come into play as well. That is why it is worth keeping your eye on Pakistan. Musharraf has just declared emergency rule. As the Christian Science Monitor says…
In a dramatic move that made explicit his desperation to preserve near-absolute power, Pakistani President Pervez Musharraf declared a state of emergency Saturday, effectively eliminating the opposition that has built against him in recent months.
In doing so, Mr. Musharraf introduced a new “provisional constitutional order” – a move many say looks more like martial law. Despite his assertions to the contrary, his decision has little to do with terrorism, analysts say, adding that his was a political calculation. With the Supreme Court threatening to declare his presidency illegal in a ruling this week, Musharraf struck preemptively against his foes.
Under the emergency order, he has sacked more than half of the Supreme Court, jailed up to 500 opposition party leaders, and shut down the independent media – assuming that the US has invested too much in him and the war on terror to withdraw its patronage. The order may also delay parliamentary elections, which had been scheduled to take place before Jan. 15.
This is a pattern that has been repeated many times in Pakistan’s history. Typical, the army eventually gets tired of backing an unpopular ruler and they kick him out. But is there really anyone out there that the Pakistani Army can stomach? Maybe if Musharraf becomes too much of a liability they will just replace one general with another.