Economics, Free Pom, Geopolitical
Don’t Panic Just Yet! (Freepom)
January 5, 2016 Jc Collins
New Year Volatility and the Shifting Sands of the Middle East
Reader Thoughts On “Don’t Panic Just Yet! (Freepom)”
Speedspirit JC as far as trade surpluses and deficits cannot the same be said about pollution and proposed carbon credits. The United States has exported all of its pollution causing industry off to China and could that cause some issues for China with the global warming crowd?
JC Collins That’s an insightful comparison.
Tony Graupp Greetings JC; I just read an article over at ZeroHedge implying further devaluation of the Yuan….
Is that what you mean by wider trading band ???
A Shocked Wall Street Reacts To China’s “Surprising” Devaluation
Less than a month ago, and just days after the Yuan was finally inducted into the IMF’s hall of reserve currency fame, the Chinese Foreign Exchange Trade System, a part of the PBOC, made it very clear that what was about to happen would not be pretty,
when it announced – in a statement which clearly everyone ignored – that going forward it would index the relative strength of the CNY not to the USD but the a basket of currencies (against which the USD to which it is pegged has been soaring).
At the time we explained that “what this means is that for anyone who thought the Yuan devaluation is over, now that the currency is at the lowest level relative to the dollar since 2011, the reality is that the devaluation relative to everyone else is only just starting.
And, with the PBOC’s warning that the “RMB is relatively a strong currency among the major international currencies” the real devaluation is, just as we warned four months ago, about to be unleashed. Expect at least a 15% reduction in Trade-Weighted terms in the coming weeks and months, especially if the Fed hikes.
One month later, it appears that not a single person heeded this warning, and now that the PBOC has unleashed a whopper of a devaluation round…
… precisely as we warned a month ago, everyone is panicking. So, more for comic relief than anything, here are Wall Street’s reactions to last night’s latest “shocking” PBOC devaluation, which nobody could have possibly seen coming.
Sean Callow, Sydney-based FX strategist at Westpac:
Today’s fixing was a big surprise, and impression is that upside risks to USD/CNY have grown
Allowing the yuan to trend lower against the dollar this year is consistent with the need to loosen domestic financial conditions to support growth
PBOC may not tolerate widening CNY-CNH spread for long since it will encourage capital outflows
Tommy Xie, Singapore-based economist at OCBC:
PBOC’s actions are conflicting: there was suspected intervention yesterday and sentiment stabilized, but it set such a low fixing today
PBOC may be taking dollar demand into consideration: usually at the start of a new year, retailers’ and corporates’ foreign-exchange requirements are higher
Central bank may be using the fixing to convey a message to the market that it doesn’t want the RMB index to be too strong
Zhou Hao, Singapore-based senior economist at Commerzbank:
Lowered-than-expected yuan fixing today shows authorities will tolerate more weakness for the time being
Will help loosen monetary conditions; still, risk of capital outflows could increase concurrently
Increasing outflow pressures may rule out excessive drop in yuan
Liu Dongliang, Shenzhen-based senior analyst at China Merchants Bank:
Yuan depreciation this week aims to stabilize the yuan index amid a stronger dollar environment
Expects 5%-10% depreciation by end of the year, though this depends on the pace of PBOC’s intervention and health of macroeconomy
So to avoid any further surprise, here is a preview of what happens next: China continues to devalue, and does so aggressively. But don’t believe us. Here is what Kyle Bass said over the weekend:
“Given our views on credit contraction in Asia, and in China in particular, let’s say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there’s one thing that is going to happen: China is going to have to dramatically devalue its currency.” Take Care Tony
JC Collins China is lowering the daily fixed rate. Currently the trading band is set at +/- 2% on either side of the daily fixed rate. When the PBoC does widen the band, likely by increments of 2%, this will allow for a more market oriented valuation for the renminbi. We are in the early stages of this.
I think many will be surprised with the appreciation of the renminbi when it comes. In the mean time, China will have to manage its domestic financial market by adjusting the daily fixed rate as required.
It’s a precarious monetary dance between the dollar and renminbi. Remember, the US wants and needs to depreciate the dollar. These moves by China is not good for the US.
Marioa “There is a lot at stake for all in the world. A level of healthy concern is understandable, but let’s not get carried away. Just yet.”
Let’s not live in denial either. History has proven over and over again:
POWER CORRUPTS, ABSOLUTE POWER CORRUPTS ABSOLUTELY. (Human nature)
JC Collins Survival instinct is the strongest aspect of human nature. The current situation suggests that a functioning level of common interests will prevent a full world wide collapse and world war.
Tony Graupp Greetings once again JC; Repeating quote from ZeroHedge above;
“” China is going to have to dramatically devalue its currency.”
Well, that didn’t take long…..in less than a couple of hours
From ZeroHedge again on todays trading; “”Bloodbath in Yuan (offshore Yuan near record lows)””… Take Care Tony
JC Collins It could go lower yet before it turns. When it does China will begin widening the trading band. Interesting times.