China desperately wants the yuan to rise to stem capital flight. Curiously, this puts China on the same wavelength as Trump, at lease as far as currencies go.
However, currency intervention does little in the short run, and nothing in the long run. Let’s take a look at some charts.
Intervention Fails Daily Look
Intervention Fails Monthly Look
What’s Going On with the Chinese Renminbi?
Via email, Albert Edwards’s Global Strategy Weekly addresses the question “What’s going on with the Chinese renminbi?”
It was somewhat perplexing that the increasing rout in the renminbi in Q4 last year barely raised a murmur of market concern. Many saw it as just the mirror image of the stronger dollar in the aftermath the Trump victory, but actually the renminbi was also being driven lower by an accelerating capital flight.
Global markets really couldn’t seem to give a toss about events in China. Yet they should. And the Chinese authorities’ huge intervention to stamp on the hands of currency speculators is a signal that should be heeded. All is not well in the middle kingdom.
BitCoin vs. Renminbi
Yesterday’s unprecedented official intervention in the overnight deposit market was intended to trigger a savage rally in he offshore renminbi as speculators rushed to cover their shorts.
Overnight Yuan Rate
This renminbi rally is likely nothing more than a short-term interruption in its decline against the dollar. Clearly with Trump’s anti-trade/China rhetoric it is most prudent to control the pace of devaluation. Indeed, amid the Christmas festivities, the Chinese authorities took out an insurance policy by adding 13 new currencies to their target trade-weighted (CFETS) basket.
China’s Currency Basket Weight
Edwards notes “In the event of another EM currency rout, like that seen in 2015, the Chinese renminbi will now be joining in!”
True enough, but …
- An emerging market currency rout has already taken place.
- The basket footnote reads “Effective dollar weight only reduced by 2.4% when factoring in pegged currencies (HKD, AED, SAR).” Thus the change looks more important than it really is.
- The US dollar is more likely to decline than rise at this point if the Trump rally fizzles, the US economy falters, or the Fed does not hike the expected three times in 2017.
All three points apply. Yet, that may not help China. It is the Yuan/USD ratio that matters most. And the yuan may not follow the US dollar index, especially if China’s GDP weakens more than expected.
OT: New Iceland post on Mish Moments: Iceland in 16 Days: Day 7, North Iceland, North Iceland, Hverir Geothermal Area
Mike “Mish” Shedlock
If trump successfully moves manufacturing from China back to America and tariffs imports to prevent dumping of products below cost to grab market share, things will get worse than better for China. Trump had better keep that bulletproof vest on, because he is kicking over too many apple carts…..globalists, intelligence agencies, foreign markets to name a few.
“If trump successfully moves manufacturing from China back to America ….”
For a guy who has never even been able to manufacture as much as a decent combover, that does sound like a tall order…
How insightful.
Manufacturing is a moveable feast. The next labor destination is the Belles according to Jim Rickards, Eastern Europe, a place Trump is somewhat akin to. There is too plenty of global overcapacity, with subprime auto loans called the next bubble. I see that as a bigger problem than who do we exploit next?
Governments can only do so much to contril free markets from leaking through to cracks of their control mechanisms. The more they interfere with the fee market, the worse it will get for them. Same applies to India.
Currency interventions eventually fail. However, in the interim, doesn’t it give the rich time to divest on the backs of the rest of the populace? If yes, then politically, its a win for TPTB.
Yes… the rich people newsletter that goes out before all big market moves.
YEAH BUT . . . THE STRONG DOLLAR IS CAUSING LAY0FFS AND GROWING INVENTORIES. SEEMS TO ME THIS CURRENCY WAR IS GOING TO BITE BACK THE OBAMA ADMINISTRATION’S DECISION.
Bankers printed credit wantonly, which misallocated loans into nonsensical projects. Now bankers may print wantonly some more to bail banks out of their loans for nonsensical projects. This will misallocate additional loans. The average person continues to move slowly backward due to banks confiscating their stuff via printing. Those who can are desperately trying to figure out how to escape the coming banker confiscation.
They need a gold standard to protect them from bankers’ risky experimentation with the economy.
I really like the Bitcoin pathway. Now we just need some of all the Chinese expats who have been crawling all over Africa the past decade, to realize BTC makes all the sense in the (3rd) world. BTCs biggest problem has long been what to do with it once you’ve got it. Setting up a bit of a Catch22, where as a result noone has bothered offering anything to do with it.
Chinese capital flight may provide the required impetus to create more general Bitcoin markets, where BTC can buy a broad variety of real goods and services. Most likely in jurisdictions where the bankster supported progressive cartel does not enjoy quite the same monopoly of arms, as they do in China and the West.
Expect to see a continuation of wealth leaving China and fleeing towards safety. The Chinese Academy of Social Sciences has forecast China’s economic growth will further slow in 2017 to 6.5 percent, this would be the slowest pace in more than 25 years. The fact is many of us with an eye on China argue this number is still far too high.
A great capital unwinding is continuing as money that has flowed into China for decades attempts to leave the country and taking with it much of the wealth it has produced. These massive capital outflows are distorting both currencies and economies throughout the world. More thoughts on this issue in the article below.
http://brucewilds.blogspot.com/2016/12/china-expecting-slower-growth-in-2017.html
Pingback: JP Morgan's COMEX Silver Stash Tops 83 Million Troy Ounces - Ed Steer's Gold and Silver Digest
Pingback: The Bitcoin drop is just a blip on the long-term radar, China, Litecoin Segwit, FUD vs strong hands | Bitcoin News and Updates