Tuesday, October 12, 2010

What Exactly is Currency Manipulation?

From Bloomberg:

Exchange rates dominated the IMF’s annual meeting as Treasury Secretary Timothy F. Geithner, People’s Bank of China Governor Zhou Xiaochuan and their counterparts split over whose policies are the biggest threat to the world economy on concern countries are relying on cheap currencies to aid growth. China was accused of undervaluing the yuan, while low U.S. interest rates were blamed by emerging markets for flooding them with capital. Brazil took aim at both the U.S. and China.

Today we have news that Thailand is increasing taxes to halt "hot" inflows:

Thailand is introducing a 15 per cent withholding tax on interest payments and capital gains on bonds held by foreign investors to curb capital inflows which are driving up the value of its currency.


The move comes amid an increasingly bitter international debate over currency policy. Other countries, most notably Brazil, South Korea and Indonesia, have taken lesser measures to control inflows. But Thailand’s move sends a clear signal that the country’s monetary authorities are willing to take unpopular and controversial measures to curb so-called “hot money” inflows.

First, here is the basic skinny on currency trading; for more advanced ideas, start with Kathy Lien's blog and books and go from there.

Traders who want to buy a currency are looking for the following:

1.) A growing GDP because this indicates outside money wants to invest in the country, thereby increasing the demand for the currency

2.) Rising interest rates, because this indicates that traders who purchase a currency will be able to park at least some of their holdings in an account drawing decent interest.

The converse is true for shorting.

It used to be that countries would simply physically intervene in the currency markets; that is, they would go into the market and either buy or sell their currency or competing currencies. Now, the arguments between governments are centering on interest rate policy, which to my knowledge has never formed the basis of a country's argument about currency valuation. Most countries would find that kind of lecturing -- especially coming out of a severe recession -- unwarranted.

At the same time, China obviously views its accumulation of foreign reserves as an internal matter as well. The question is logically, is there a meaningful difference between the two that allows one country to pry into internal matters while the other country does not have a logical leg to stand on?