Renminbi

With the dollar tumbling overnight, many were scratching their heads as to what caused the move in the dollar. Citi's Stephen Englander provides a useful explanation, which fits perfectly with the commentary from PBoC advisor Li's earlier that the dollar's position as a reserve currency is now "absurd": namely that more and more in the world are starting to look at the CNY as the new reserve currency. And as we pointed out earlier, its fixing surge of over 0.5% overnight caused many to blink. Is China finally pushing to aggressively force the dollar out?

Our friends over at Big Macro have put together the latest issue of their periodic newsletter. In this issue they look at the at seemingly inexplicable divergence between the VIX and the EURUSD 3 month implied correlation (never a good sign), the increasing delinquency rates across all consumer loan classes (as in buying but not paying, leading to companies like Netflix which made $7 million in cash in the quarter to have a market cap of over $8 billion), but most notably at the differential between commodity prices and the CPI, superimposed against inflation. What is uncovered is that while when unemployment is below 6% companies can increase prices faster than commodity prices can go up, at current levels of joblessness, it will be impossible to pass through surging input costs (whether these be in wheat, cotton, or rare earth minerals). This leads to the conclusion: "What does this mean for the inflation/deflation debate? If the FEDs QE program will continue to push up prices, companies can only squeeze their margins so much. The reason we are not seeing  inflation today is that there is a lag in the feed trough from commodity prices to consumer prices, partly because companies have been able to temporarily save their margins by aggressive cost cutting. I think we are potentially set up for a big decline in returns for equity investors." The last statement has a linear severity with the amount of free money that Bernanke floods in the market in two weeks.

Somebody forgot to give the PBoC the memo about that whole "PBoC eliminating the dollar peg" thing. According to the just released fixing by the Chinese Central bank, the USDCNY today was at 6.8275, the exact same as Monday. And adding just a little insult to injury, the PBoC devalued the CNY against the EUR by juar under 300 pips: from 8.4538 to 8.4825. That's ok though, the HFT brigade already has its wax on, er, risk on, no volume marching orders.