Germany's Bruederle Lets Euro/Trade Cat Out of the Bag

The US presses China to appreciate the yuan to redress the bilateral imbalance. China says that the currency is not the key to the trade balance. US Congress seems to think this is a self-serving explanation.

Germany, which exports roughly the same share of GDP as China (~40%), is thought to often prefer a weaker euro. Today German Economics Minister Bruederle says this is not true. The euro exchange rate is not decisive for German exports. He argues the "excellent quality" of the goods drives demand.

As we and others have pointed out Germany has also delivered stable unit labor costs, while most other European countries have not been able to match the German prowess.

Studies of the cost structure of US imports from China explain why modest appreciation of the yuan is also unlikely to substantially alter US-Chinese trade balance. Roughly 1/4 of the retail price of a good from China reflects the inputs of that good that China has to import and those are often invoiced and traded in US dollars. Roughly 50% of the retail price can be traced to costs incurred in the US--like the wholesale markup, the retail markup, storage, transportation and marketing of the good. That leaves only 25% of the retail price of a good from China as having been incurred in terms of the yuan.

In any event, key support for the euro is seen in the $1.3480-$1.3500 area, with stop loss selling on a break that could see euro losses accelerate.