Whose-muz?

By Michael Every of Rabobank

Whose-muz?

Oil leaped 9%, the largest move since 2020. Today, it’s up another 2.5% to $85 at time of writing. It’s a good job we also have the Cleveland Fed’s trimmed-mean inflation measure out as well, right? Obviously, oil was driven by developments in Hormuz – or rather Whose-muz? There, besides reimposing the naval blockade of Iran, President Trump stated those using the waterway will now pay 20% of the value of cargo as compensation to the US, the strait’s new guardian. While the proposed Iranian toll the US rejected was $2m per tanker, or $1 per barrel of oil and $22 per tonne of LNG, Bloomberg estimates Trump fees at $30m per supertanker, the equivalent of $8 on oil and $177 on LNG. Naturally, the UN shipping agency is opposed to any fees for any strait and wants details on that Trump tariff – as if that will stop it.

More bluntly, Iran responded with missile attacks on tankers, with two from the UAE hit, as well as more strikes against the GCC and US military bases, the latter so far avoiding both energy and critical infrastructure. As we noted in ‘Germany was artificially competitive within the Eurozone because of the low FX rate it was allowed to join at, Chancellor Merz just called for a dialogue with China on its monetary and FX policy, saying that the EU could not win, no matter how innovative or good the bloc may be, against a competitor that artificially manipulates its currency. He argued that CNY is 20-30% undervalued and needs to be allowed to float more freely so that it can appreciate to a fairer level. In this, listening to Europe in 2026 is like listening to the US in 2016.

To be clear, there is no world in which China will allow, or Europe is in any way able to impose, a new Plaza Accord on China: it is not going to happen. End of discussion. China could decide it wants to see CNY appreciate for its own reasons, such as to shift towards consumption as a growth driver, which is different. However, that’s a strategic theme echoed for decades by (mostly Western) economists, who are constantly surprised when it doesn’t happen and China’s trade surplus grows, and ever higher up the value-added ladder.

Yet the surging Chinese trade surplus with the EU, which is now larger than with the US and is close to doubling since 2020, must be addressed by October (by magic; or Chinese pledges of purchases of EU soybeans; or of Airbus aircraft when Beijing is also winking at Boeing?) or Europe says it will be forced to follow the US high tariff path after many years of patronising eyerolling at how disruptive such atavistic tactics are. China trade data today saw its imports up 36% y-o-y vs. 26.1% expected and exports up 27% vs. 19%: we will have to wait for the breakdown of the EU numbers, but they are unlikely to show what Brussels wants to see.

The larger point here is one repeatedly underlined in this Daily for many years: the problem is not one of FX levels, per se. Rather, it is of economic statecraft (a neomercantilist model) vs. neoclassical/neoliberal economic policy (a ‘free trade’ Merkelcantilist model), between which there is only one realpolitik winner: the former. If you dispute that fact, look at any pertinent production data, especially on the military side, or ask yourself which of the two is better placed to ride out an energy crisis. The logical trajectory on that basis is therefore to either assume the macroeconomic and market dynamic wherein:

• (i) the latter model adapts to the former by mirroring it, as we specifically projected in the case of the US vis-à-vis China in 2017 – and here we are in 2026; or
• (ii) the latter model doesn’t change, so continues to see ever-wider trade deficits, deindustrialisation, political polarisation, lack of strategic autonomy, and “slow agony,” as Draghi put it. And that’s before we get the fast-forward pain of who controls Hormuz.

Anyway, while we wait for Warsh’s take on the above, the Fed’s Waller has just warned of sticky inflation suggesting more rate hikes might be needed, as has the RBNZ’s Conway. Yet that all depends in large part on who wins the current battle in the Middle East, and how quickly – which is a reflection of the effectiveness of a given political-economy model.

Whocouldanooed?