Peeling back the top line geo-political issues, global trade relations with China looms as a major concern, particularly for the sporting goods sector that is so heavily sourced in China. What's afoot is the combination of (1) the huge and growing Chinese-U.S. trade deficit, (2) the growing concern of both European and Canadian policymakers over the impact Chinese monetary policy is having on their currencies, and (3) the threat that the Chinese economy is about to overheat - coming together to exert mounting pressure on the Chinese government to modify its exchange rate policy.
You will notice that the continuing fall of the U.S. dollar against the Euro, Pound, Yen and Canadian dollar isn't highlighted because of the stated policy of the U.S. Government. While the Secretary of Treasury asserts that a strong dollar is the U.S. policy, the administration continues to espouse support for a weaker U.S. dollar increasing U.S. exports, thus helping to ramp-up manufacturing and hiring. Whatever the U.S. policy, it isn't producing proactive actions to drive the dollar up against foreign currencies, so the implication is that it is at least acceptable to do the opposite.
The Chinese do not react well to international pressure, and up to now, have dug their heels in and refused to even discuss changing their current policy of pegging the RMB (Chinese Yuan Renminbi) to the U.S. dollar. However, since the EU and Canadian governments have recently joined the U.S. in exerting pressure on the Chinese government to take some action in regard to monetary policy, there is growing hope in the West that China will do something in the near-term.
What it is hoped China will do is announce a modest revaluation of the RMB this year, tied to a plan that will ultimately culminate in its floating its currency. Such a move will cascade to the other Asian nations that currently peg their currencies to the RMB, or to the U.S. dollar. The combination should offer some relief to European and Canadian currencies in the form of corresponding devaluation, and bring some cooling to the mounting inflationary and speculation pressure in China's internal markets.
As for the U.S. dollar, there is the possibility of small appreciation vis-a-vis the Euro and Canadian dollar. However, on the broader trade-weighted basis, the U.S. dollar would still fall under this scenario - an estimated additional 5% this year and no less than an additional 5% in 2006.
Please be aware that no-one in the West really knows what the Chinese government will do to modify its monetary policy, and the forgoing is based on the speculation and forecasts of economists and published press reports concerning such speculation.
What does this mean to your business? We have reviewed this situation in the past and buyers should plan on the devalued U.S. dollar dropping even further over the next two years. Sellers should plan on establishing their beachheads in foreign markets, and Europe in particular, ASAP. One last caution - this could get messy, and there have been rumbles about the U.S. imposing special tariffs on Chinese imports in order to force a change in monetary policy, so pay close attention to this situation until it is resolved in whole or part.
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