From: chet_fenner@bmc.com
To: joe.parks@enron.com
Date: 2002-06-20 14:32:05+00:00
Subject: Monster US Trade Deficit, FX World June 20, 2002

Thought you would find this guy's FX write-up interesting today...

 

From: Michael F McGuinness on 06/20/2002 10:09 AM

 

 

Simple thoughts.....

 

US assets get sold... (mostly equities).... and then the USD is sold.....

 

It's not the other way around.

 

The world is losing confidence.  Everyday we get more terrorist activity around

the world. (sorry Reuters.... it's terrorism....)

 

 Uncertainty is higher...... Risk is higher...... People around the world want

their money close to home. So off they go to sell their investments here in the

States, sell the USD and buy their home currency.

 

US April trade deficit came in at $35.94 bln..... a record. Here's the part

that's amazing..... the trade imbalance in goods.... US deficit in goods

only.... $39.92 bln..... $40 bln goods imbalance in just one month....

 

And where are we importing from.....

 

China.... $7.55 bln and this is a natural phenomena since about any product

sold these days under $100 in the US these days is made in China......

compliments from Mark....  China has a competitive advantage, and trade rules

will dictate that goods will originate from China until the cost structure

adjusts...... say in 25 years......

 

Western Europe...... $7.244 bln..... yeah the standard of living in Europe must

be the same as China....... with higher short term rates in Europe..... growth

in many industries in Europe is from the US. How can anybody in Brussels think

that a trade surplus with the US almost equal to China's (and one that is

larger than Japan's...) is a proper economic condition.......   As I said on

Tuesday.... I believe that the purchasing power parity level for the EUR is up

over $1.0800. (this is based on some long term thoughts.... that the old DEM

for PPP was 1.80 against the USD....)

 

The EUR is undervalued by 12.5%. That's why I think it's funny that European

politicians and the press feel that the EUR is strong up here the .9500 - .9600

area.

 

If a few people in the Bush administration start thinking that the US trade

picture needs to change...... you may have heard the last utterance of anyone

saying they want a strong USD.......

 

The US current account deficit in Q1 2002 was $112.5 bln....  So the US has to

attract $37.50 bln per month to keep this in balance......   to do so either

asset prices need to go lower or the USD has to go lower......  both is

happening.....

 

Well, the US trade deficit is getting closer to 4.5%  of GDP.  Just the

deficit.... and just extrapolate that for the CA deficit.......

 

So the EUR just popped up over .9600 and a boatload of stops were just done

into the .9625-30.  And now will have settled in at .9610. There are no

retracements in the EUR, just quiet periods of consolidation.

 

Until we get a screaming need to own US equities..... there appears to be no

need to own USD, and no retracement of the EUR.

 

Japan's trade surplus with the US..... $6.8 bln.  The game continues.....

USD/YEN 123.50 and no Bank of Japan...... I think, it would not be in the best

interest for the Japanese to be seen intervening right after this monster of a

trade deficit.

 

Japan overnight announced that their May trade surplus rose 715% y/y.......

Anything that climbs over 700 % is not normal...... most of Japan's trade

surplus with the rest of Asia rose 626%......

 

But every month,  Japanese authorities will need to vacuum up about $7 bln USD

just to keep the YEN stable against the USD,  as the current imbalance in trade

creates pressures for a firmer YEN.......  Who knows, maybe  a few voices in

Asia could clamor....  that the YEN is too weak.....

 

Bank of Japan foreign reserves in USD is over $400 bln these days and climbing,

(I think $406 bln in April and $419 bln in May)........ Maybe Japan will

someday dollarize........

 

Canada's trade surplus with the world is up 11.0% to $5.2 bln. Automotive

exports... the key.  The CAD trade surplus with the US was $8.2 bln and a

deficit with the rest of the world at $3.0 bln. (The US commerce department has

the CAD surplus at $4.1 bln....)

 

SGD at 1.7775.... firmest level since last October. It's moving on it's own, no

sympathy move with the YEN.... so either the YEN has to play catch-up or the

YEN is going to weaken against the rest of Asia....

 

Thai baht is also firm at 42.00 against the USD.  Korean won still at 1210.

Asia definitely looks better with the US trade deficit.

 

Venezuelan bolivar a record low at 1305 to the USD, since May 1 the VEB has

devalued 52%.   Not much more to say.....

 

Everyone have a great day....... the above thoughts are for your reading

pleasure. Any questions call me. All the best.

 

 

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