Wednesday, June 4, 2014

China's FX policy back in focus in the US

The US trade deficit number came in far worse than expected this morning (see chart). While this report points to US consumers starting to spend a bit more (see chart), a great deal of the stuff they have been purchasing came from China.
The Seattle TImes: America's trade gap with China jumped 33.7 percent to $27.3 billion in April, the largest gap since January. The U.S. deficit with China is the largest with any country, and this year's imbalance is running ahead of last year's record pace. That is putting pressure on the Obama administration to take a tougher stand on what critics see as unfair trade practices by China.

They say Beijing is manipulating its currency to keep it undervalued against the dollar. That makes Chinese goods cheaper in the United States and American products more expensive in China.
This comes at a time when China's currency has been weakening, which is sure to provide additional ammunition for US politicians who have been highly critical of China's trade practices.
BMO: - The trade deficit with China will likely be scrutinized again as it grew nearly $7 bln to $27.3 bln and it comes as the U.S. brings China’s FX intentions back into play.

Chart shows the dollar appreciating against the yuan (source: Reuters)

The relationship with China is already tense - watch it deteriorate further.

As a side note, the trade situation wasn't helped by the devastating pig virus (Porcine Epidemic Diarrhea) in the US, with numerous nations banning US pork imports. The irony of the situation is that scientists think the virus originated in China (Anhui Province).
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