Saturday, March 22, 2008
The $ is falling - what about it?
I'll go over in my next post how a falling dollar leads to rising commodity prices, but I've got a class to attend so I'll cover one of the key advantages of the falling dollar in this post.
The good thing about a declining dollar it is balancing the worlds balance of payments and capital flows -
We all know that China's trade surplus is a quarter of trillian USD while the US trade deficit is close to a trillian US (-$820 bn for the last 12 months). China has been lending billions of dollars to the US for them to buy its exports. With the yuan/$ now at 7.07, as opposed to the fixed peg of 8.28 and 8.08 some time back, Chinese exports are losing their edge. As part of my portfolio two of the 4 products I cover are polymers that go into making plastics, packaging material and every possible household good you can imagine. I can vouch for a fact that these producers' margins are so much in the red its not funny.
To take you down the chaing - High crude prices feed into into downstream naphtha/gasoline which gives benzene, toluene, ethylene, propylene, butadiene, xylenes etc. which give various solvents like MX,styrene etc.which then eventually give polyxylene, polystyrene, polyethylene and ABS -polymers used in make all of china's exports. The problem now it upstream costs of crude oil, naptha are not able to make their way felt into final product prices, because fo weak/sluggish demand. Thus Chinese producers now raw material cost climing up, labor costs(explained below) climbing up, other fixed costs climbing up, and feedstock margins drastically reducing.
China has a new labor law it introduced on January first, that gives far greater welfare benefits to workers, and has increased costs by atleast 10%. The snow blizzard around the lunar new year time caused such havoc, producers are yet to recover. Producers in Guandong province, said that in some places there's no electricity for 3 days of the week. Not only that, its well know that the Shanghai stock exchange plummeted the other day on news that the Central bank would tightly monitor prices to curb inflation. The price regulations in place in China is making it difficult for them to raise prices. Thats the microeconomic view. On the ground in China, its not pretty.
Anyway back to my point of the falling dollar balancing the world credits and debits - it would do the the world a lot a good, for the US to clean up its deficits and for the China to cool of a little.
tJust to point out two main fallouts of a falling dollar
1. Currencies exchange rate against dollar rise suddenly-like the yen and the euro, and their exports suffer
2. Inflationary impact, inflation targeting might lead to raising the short term interest rates before economic recovery- but Bernanke seems to be handling it well. Given his 75 basis point was cheered on by wall street before ofcourse, crude oil data came struck it down again.
I'll go over in my next post how a falling dollar leads to rising commodity prices, but I've got a class to attend so I'll cover one of the key advantages of the falling dollar in this post.
The good thing about a declining dollar it is balancing the worlds balance of payments and capital flows -
We all know that China's trade surplus is a quarter of trillian USD while the US trade deficit is close to a trillian US (-$820 bn for the last 12 months). China has been lending billions of dollars to the US for them to buy its exports. With the yuan/$ now at 7.07, as opposed to the fixed peg of 8.28 and 8.08 some time back, Chinese exports are losing their edge. As part of my portfolio two of the 4 products I cover are polymers that go into making plastics, packaging material and every possible household good you can imagine. I can vouch for a fact that these producers' margins are so much in the red its not funny.
To take you down the chaing - High crude prices feed into into downstream naphtha/gasoline which gives benzene, toluene, ethylene, propylene, butadiene, xylenes etc. which give various solvents like MX,styrene etc.which then eventually give polyxylene, polystyrene, polyethylene and ABS -polymers used in make all of china's exports. The problem now it upstream costs of crude oil, naptha are not able to make their way felt into final product prices, because fo weak/sluggish demand. Thus Chinese producers now raw material cost climing up, labor costs(explained below) climbing up, other fixed costs climbing up, and feedstock margins drastically reducing.
China has a new labor law it introduced on January first, that gives far greater welfare benefits to workers, and has increased costs by atleast 10%. The snow blizzard around the lunar new year time caused such havoc, producers are yet to recover. Producers in Guandong province, said that in some places there's no electricity for 3 days of the week. Not only that, its well know that the Shanghai stock exchange plummeted the other day on news that the Central bank would tightly monitor prices to curb inflation. The price regulations in place in China is making it difficult for them to raise prices. Thats the microeconomic view. On the ground in China, its not pretty.
Anyway back to my point of the falling dollar balancing the world credits and debits - it would do the the world a lot a good, for the US to clean up its deficits and for the China to cool of a little.
tJust to point out two main fallouts of a falling dollar
1. Currencies exchange rate against dollar rise suddenly-like the yen and the euro, and their exports suffer
2. Inflationary impact, inflation targeting might lead to raising the short term interest rates before economic recovery- but Bernanke seems to be handling it well. Given his 75 basis point was cheered on by wall street before ofcourse, crude oil data came struck it down again.
Labels: Commodity'n'Currencies
# posted by qq @ 7:56 PM 
