Thursday, August 27, 2015

China liquidates US treasuries to support yuan

Running a trade surplus makes your currency stronger, and in the graph below, we see the yuan appreciating relative to the dollar, from rom over 8 to the dollar, to only 6.5.  It would have appreciated faster, but the Chinese government has been buying buying treasuries to slow appreciation, which makes their exports cheaper than they would have been, which helps Chinese companies and employment (but hurts Chinese consumers).

A few weeks ago, the Chinese government's decided on a sudden depreciation the yuan (back down to 6.5 to the dollar) to stimulate their domestic economy.  You can see this in the small spike at the far right of the graph.  But now the Chinese government has decided that the currency fell too far, and has been selling treasuries to support the yuan.

The clear takeaway is that there's a substantial amount of upward pressure building for UST (US Treasury) yields and that is a decisively undesirable situation for the Fed [Federal Reserve] to find itself in going into September.

If the Chinese sell treasuries (borrowing by the US government), this puts downward pressure on treasury prices, and upward pressure on yields.  If US treasury yields rise, the cost of borrowing increases, and the government (and private borrowers) will face a higher cost of capital.  The dollar will also appreciate.  All of these effects will hurt US companies (and employment).

The interactions between markets (foreign exchange, domestic unemployment, domestic interest rates) is the hallmark of macroeconomics.  Microeconomics typically focusses on only one market at a time.

1 comment:

  1. It’s always so tough to decide up these things and that’s why we should be doing strong money management since that’s the only way we will get success. I am working with OctaFX broker where I can have really good money management thanks to their massive bonus of 50% on deposit, it’s really nice since this is a type of bonus which is completely use able, so that’s what makes it so good and easy to use for everyone connected.