English children have a card game called ‘Beggar my Neighbour’, where the aim is to win all the cards from your opponents. Central bankers seem to be learning its rules, and applying them to currency trading. OPEC’s weekend summit showed it is clearly worried that it will have a losing hand if oil remains priced in US$.
US exports have been booming recently, whilst imports have been falling, as can be seen from the chart below produced by the American Chemistry Council (ACC). In a recent note, the ACC estimated that US chemical exports are up 18% versus last year, whilst imports are down 6.7%. As a result, the US trade deficit in chemicals has fallen from $6.7bn to just $0.6bn through September.
In the background is 2007’s 16% fall in the value of the US$ against a basket of currencies. This is making it much easier for US-based chemical companies to boost exports, and so compensate for the housing/auto-led sales decline in their own domestic market. But the US’s trading partners are now expressing unease.
Last week, Japanese PM Fukuda followed the European Central Bank in complaining about the soaring value of the yen versus the US$. Whilst UK central bank governor Mervyn King explicitly warned that the UK pound would need to fall, in order to close the UK’s £7bn/month trade deficit in goods.
Now OPEC has joined the chorus of dissent. Ignoring a warning from Saudi Arabia that any currency discussion might cause the US$ to ‘collapse’ (a warning that was ‘accidentally’ broadcast to the media!), OPEC members pointed out that in euros, their average netback is actually lower in euros this year than in 2006.
Any move by OPEC to price oil in a basket of currencies, rather than the US$, could cause major feedstock cost increases for the global chemical industry, as well as disrupting US chemical exports.
Fluctuating currency values look set to be another cause of uncertainty about the prospects for 2008.