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Weekly Commentary: “Whatever They Want” Coming Home to Roost

October 27, 2018

Weekly Commentary: “Whatever They Want” Coming Home to Roost

Let’s begin with global. China’s yuan (CNY) traded to 6.9644 to the dollar in early-Friday trading, almost matching the low (vs. dollar) from December 2016 (6.9649). CNY is basically trading at lows going back to 2008 – and has neared the key psychological 7.0 level. CNY rallied late in Friday trading to close the week at 6.9435. From Bloomberg (Tian Chen): “Three traders said at least one big Chinese bank sold the dollar, triggering stop-losses.” Earlier, a PBOC governor “told a briefing that the central bank would continue taking measures to stabilize sentiment. We have dealt with short-sellers of the yuan a few years ago, and we are very familiar with each other. I think we both have vivid memories of the past.”
The PBOC eventually won that 2016 skirmish with the CNY “shorts”. In general, however, you don’t want your central bank feeling compelled to do battle against the markets. It’s no sign of strength. For “developing” central banks, in particular, it has too often in the past proved a perilous proposition. Threats and actions are taken, and a lot can ride on the market’s response. In a brewing confrontation, the market will test the central bank. If the central bank’s response appears ineffective, markets will instinctively pounce.

Often unobtrusively, the stakes can grow incredibly large. There’s a dynamic that has been replayed in the past throughout the emerging markets. Bubbles are pierced and “hot money” heads for the exits. Central banks and government officials then work aggressively to bolster their faltering currencies. These efforts appear to stabilize the situation for a period of time, although the relative calm masks assertive market efforts to hedge against future currency devaluation in the derivatives markets.

…click on the above link to read the rest of the article…

As China’s Offshore Yuan Crashes To A 2 Year Low, Beijing Warns Its Citizens: “Don’t Buy Dollars”

January 30, 2015

As China’s Offshore Yuan Crashes To A 2 Year Low, Beijing Warns Its Citizens: “Don’t Buy Dollars”

We won’t go into the specific details of China’s burst housing bubble, the shady underworld of itspyramid scheme wealth-management products, the fact that any hard asset in China is rehypothecated literally a countless number of times, the nuances of its deflating shadow banking system, or even the complexities of its alleged capital controls (alleged, because as a reminder, they only exist for the common folks – the really wealthy Chinese are naturally exempt from any capital flow constraints). We will point out something even more disturbing.

Recall that China, a mercantilist, export-driven country, has a currency that is pegged to the dollar in all but name (yes, the technical peg was dropped in 2005 but since then the PBOC controls the daily moves in the strictest and tiniest of increments), a dollar which has soared in the past 6 months to levels which have prompted countless other central banks to ease in recent weeks, and even forced the Swiss National Bank out of the currency wars, waving a flag of surrender. As a result, China’s exports have been crushed regardless of what fabricated and goalseeked Chinese data will have gullible observes believing.

And while the value of the local Yuan, the CNY, is set by bureaucrats and policy makers on a daily basis, and trades in a tight band around a specific, political number and thus never truly reflects the fair value of the Chinese currency, its offshore cousin, the CNH, floats and is impacted by the private demand of the Yuan. As such, the latter is far more indicative of the pressures that face the Chinese economy and what financial interests dictate should be the fair value of the domestic currency.

It is also the former, the Offshore Yuan, that overnight hit a two-year low, reaching a level not seen since September 2012.

…click on the above link to read the rest of the article…

 

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