Let's begin this week's reckoning with some lip service for the performance of the S&P 500. America's big blue chip index was up 10% in the first quarter. It made a new all-time high late last week when it closed at 1569. It took six long years from the 2007 high until now. But we made it!

Well, 'we' didn't do anything really. It was the Federal Reserve and Ben Bernanke. But in putting a floor under stocks by crushing bond yields (and savers) the Fed has given the Bank of Japan, the European Central Bank, and the Bank of England a template for engineering higher stock prices. Just keep on printing money to buy bonds and eventually you'll force savers to buy stocks.

The first quarter euphoria was short-lived, though. Japanese stocks fell by over two per cent in Monday trading. The S&P gave back its all-time high straight away. Aussie investors will come back to a market that now has to sober up and focus on earnings. With the RBA unlikely to make any change in interest rates today, the actual performance of the actual economy - instead of monetary policy - will have to drive stocks.

There's also China. Australia and China are set to ditch the US dollar in their bilateral trade, according to an article in the Australian this weekend. Julia Gillard will travel to China next weekend to sign a deal that allows the Australian dollar to be directly converted into Chinese Yuan. Businesses in both countries can deal with each other directly, rather than using the greenback as the currency middleman.

This is the world After America, then? China is Australia's top trading partner. There was over $120 billion in trade between the two countries last year. Over 30% of Aussie exports go to China. And Australia is China's fifth-biggest trading partner when it comes to imports. Direct convertibility of the currencies will promote even greater trade and commerce.

Let's just hope China doesn't go bust! New Chinese President Xi Jinping is the former communist party secretary for Shanghai. He's aiming to making Shanghai a financial centre on par with Hong Kong. But he and others in China's new leadership cadre are also busy trying to prevent a property bubble.

'China's political and financial capitals moved to put new restrictions on home ownership over the weekend, the latest in a series of measures by Chinese officials to stem the formation of a property-market bubble in Beijing and Shanghai,' reports the Wall Street Journal. Shanghai banks will raise down payment and mortgage rates for second home buyers. In Beijing, new first home buyers will be restricted to buying one home, along with an increase in down payments for second home buyers.

Both bits of news out of China are really dispatches from the currency wars, but in disguise. In the first case, sidelining the US dollar from two-way trade is a sign of the times. It's an attempt to end dollar hegemony and slowly reshape the world's monetary order (something we think will happen in 2015 with the Treaty of Shanghai, which we wrote about in our March issue of The Denning Report).

The move to slow down China's housing bubble - without causing a bigger bust - is the problem of containing inflation once you've expanded liquidity in the financial system. In order to peg its currency to the US dollar, which China does to keep its exports cheap, it must match US monetary policy. All the new money in China finds its way into real estate and infrastructure development. That's great for Aussie resource exporters feeding the boom. It's not so great in the sense that it's a bubble.

Maybe what Australia needs is a little money printing of its own. Manufacturing activity has fallen for the 14th month in a row, according to a survey from the Australian Industry Group released today. The Group blamed the strong dollar and weak construction spending for the slump. The only sector to expand in February was the wood and paper products sector.

By the way, US manufacturing fell in March, according to a survey from the Institute of Supply Management. The ISM reading was above 50 but lower than expected. America's factories are humming. But they're not humming as fast as they were in February.

This is also a currency war story. Japan, the US, and China are all trying to drive growth through exports and manufacturing. To do that, the currency must be crushed. Australia is a bystander in the currency war. But bystanders can be hit by bullets too.

Regards,
Dan Denning
for The Daily Reckoning Australia