China floating is more about the Euro than bowing down to US pressure

From the WSJ:

A Chinese central bank adviser gave an upbeat assessment on the euro's long-term outlook and said global financial markets may have overreacted to the European sovereign-debt crisis.

Li Daokui, an academic adviser to the People's Bank of China, also told a financial forum on Friday that a major appreciation of the yuan is "impossible" because China's international payments are relatively balanced.

He repeated the official stance that the yuan float will be in two directions.

His views may not necessarily reflect the central bank's thinking, though he is at a position that his view can be heard by decision makers.

The comments came after the yuan rose to a modern-era high against the U.S. dollar on the eve of the Toronto summit of the Group of 20 industrialized and developing nations. Many analysts said the yuan would return to gradual gains in the week ahead, as Beijing won't be willing to see sharp rises in the yuan hurting local exporters.

A week ago, China removed its peg to the U.S. dollar, in place for nearly two years, returning the currency to a managed-float system that references the yuan to a basket of currencies that includes the euro. China's officials have said the move will help ease the pressure on the yuan to appreciate against the euro amid the euro-zone debt crisis.

China does what it wants for their own sake and doesn't really care about international pressure. They see the potential for the Euro weakening against the US dollar to threaten their exports. If they remained pegged to the US dollar, they lack tools to combat the Euro decline!

China moved to a float why? in order to have the flexibility to manage their currency against the Euro, NOT because the US wants to brand them a currency manipulator. Perhaps the Euro might rise in this case. I believe currency traders have caught on this idea. Euro shorts better be careful!

China's peg was released on the weekend, Wednesday Euro rallies while stock markets fall.

This is shaping out to be a battle royale! China and US versus the EU. Is China taking on more than it can chew in managing its currency against both US and Europe?

Game Theory at work, US and Europe!

Game Theory, more specifically the Nash equilibrium, Prisoners Dilemma is alive and well in the world. Europe is doing what is best for itself and US is doing what is best for itself. They can both cooperate for better gains but they won't even though it may be in their best interest to do so. (i.e. printing money the way US wants it done)

Apparently US needs help outside of itself to get the economy going again. If Europe won't cooperate with money printing, kiss Geitner's and Bernanke's money printing based solutions goodbye. Of course, they could print even more money, but it is hard to justify buying more assets to debase the currency as there is no crisis. Let's see where Bernanke goes with this.

Anyways, like I said before the US swap lines are open, but the ECB isn't using them. The swaps mean the US gets ECB bonds, Europe gets US Treasuries. ECB in turn, buys crap assets such as sovereign bonds with US money. If the ECB is gone sometime in the future, guess who will own the crap sovereign debts!

ECB slow pokes, get ur shorts on!

From The NY times:

The European Central Bank said Monday that it had spent 26.5 billion euros buying government or corporate bonds since it began the debt purchases May 10, an amount that some analysts still consider inadequate to stabilize the euro zone’s financial system, Jack Ewing reports in The New York Times.

“The central bank has massive firepower but is not deploying it yet,” Silvio Peruzzo, an analyst at Royal Bank of Scotland, said in an e-mail message.

The disclosure Monday, in a routine announcement on the central bank’s Web site, indicated that the bond purchases in the week ended Friday were a relatively minor 10 billion euros, or $12.4 billion, after purchases of 16.5 billion euros the previous week. The bank has not disclosed what kinds of bonds it has been buying.

Yields on paper issued by Greece, Portugal, Spain and other highly indebted euro-zone countries have plunged since the central bank began the purchases. But though the purchases have achieved their goal of halting a sell-off of sovereign debt, the amount is still small compared with the total volume of bonds in circulation.

In a report issued earlier Monday, analysts at Royal Bank of Scotland estimated that European banks, insurance companies and other institutions hold some 2 trillion euros in government and corporate debt from the so-called peripheral euro zone countries.

LOL....I think every trader is calling the ECB on 25 billion in purchases so far for the month, cuz they are slow-walking the buying process. Come on, short Euros are going to come at them with everything they have. Still got 970 billion Euros to go!

This is the Fed Reserve Balance sheet.

Fed Balance Sheet (source: zero hedge)

You can see how ridiculously responsive the Fed was at QE. Thus we had a big rally! Come on ECB! Do it for the love of Money!

Euro FX futures