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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: orkrious who wrote (34067)7/22/2005 9:17:26 PM
From: regli  Read Replies (1) of 116555
 
I think it will take a while to gauge the longer term effects of the Chinese move.

The bond market initially overreacted driven by thoughts that the Chinese would now cut back on dollar bond purchases. However, given the fact that we don't even know what the Chinese basket is, reality struck and we all now have to take a wait and see attitude.

As for myself, I expect hot money to flow INTO China because China blinked in most people's eyes. People will now pile in as they believe that China will soon blink again.

I don't think that will be the case. However, to make that look credible, China has to walk the walk and that is to disclose the basket and diversify away from the dollar and face the pain that this brings with it.

If they don't disclose within reasonable time (2 months?), I will take it as a sign that this was all for show and that we will potentially see even increased purchases of dollars by the Chinese in the short to medium term resulting in even lower bond yields. The Chinese are like the lead dancer that most of the Asians watch. They'd love to front run but most likely have to follow every step of the way.

To me these issues perfectly illustrate the fallacies of the Breton Woods II regime. Nobody wants to give an inch in the moves that cause pain but all parties need moves by the other in order to avoid pain. In a stand-off like this, the party that moves first has the advantage because it can decide the course of the game. We will see if the Chinese move was a fake or a real move.
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