Tomorrow’s Treasury International Capital flow report will shed more light on whether the low yield in the US has driven sovereign wealth funds out of the US dollar. According to a recent report by China, they have continued to buy US dollars despite doubt that they would be unwilling to fund the growing US deficit.
With the Bush Administration leaving office on Tuesday, it is interesting to consider if the Obama Administration will change its approach on China. As Treasury Secretary, Paulson has favored the buddy versus bully approach to China. Although the Chinese Yuan has appreciated 15 percent over the past 2 years, it is still considered undervalued. If Obama labels China as a currency manipulator or takes more active measures to get the Asian giant to strengthen the Yuan, it could lead to further USD/JPY weakness as it would give the Bank of Japan less reason to intervene and sell the Yen.