Last week, in the global currency war’s latest escalation, Kazakhstan instituted a free float for the tenge causing the currency to immediately plunge by some 25%. The rationale behind the move was clear enough. What might not be as clear is how recent events in developing economy FX markets stem from a seismic shift we began discussing late last year - namely, the death of the petrodollar system which has served to underwrite decades of dollar dominance and was, until recently, a fixture of the post-war global economic order.
As the great EM unwind continues unabated, we’ve noted that in some hard-hit countries, the terrible trio of falling commodity prices, decelerating Chinese demand, and looming Fed hike has been exacerbated by political turmoil. Now, we turn to Malaysia where an already tenuous situation just got worse as PM Najib Razak is now facing calls for a no-confidence vote amid allegations he embezzled some $700 million from the country's development fund.
Even before the latest shot across the bow in the escalating global currency wars, EM FX was beset by falling commodity prices, stumbling Chinese demand, and a looming Fed hike. And while, as Barclays notes, "estimating the global effects China has via the exchange rate and growth remains a rough exercise," more than a few observers believe the effect may be to spark a Asian Financial Crisis redux. For their part, BofAML has endeavored to compare last week’s move to the 1994 renminbi devaluation, on the way to drawing comparisons between what happened in 1997 and what may unfold in the months ahead.
To keep the credit induced boom going,policy makers have convinced themselves that more credit and more money, provided at ever lower interest rates, are required. Why then, as The FOMC Minutes just showed, do the decision makers at the Fed want to increase rates? If Fed members follow up their words with deeds, they might soon learn that the ghosts they have been calling will indeed appear — and possibly won’t go away. The sooner the artificial boom comes to an end, the sooner the recession-depression sets in, which is the inevitable process of adjusting the economy and allowing an economically sound recovery to begin.
Having covered the issue of “competitive devaluation” and currency-debauchment in considerable depth in recent commentaries, China’s “surprise devaluation” of the renminbi provides a practical, current example to illustrate the economic dynamics at work here.
"Time is now rapidly running out," warns The Telegraph's John Ficenec as the British paper takes a deep dive into the dark realities behind the mainstream media headlines continued faith in central planning. Sounding very "Zero Hedge", Ficenec warns that from China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.
Previously we reported on Horseman Capital's uncanny ability to generate market-beating returns (outperforming 98% of peers since 2012) despite having a net -50% short position offset by treasury longs. Now, we take a quick detour into one of the prop investment bets used by Horseman's CIO, Russel Clark, namely Hollywood's ability to pull a Dennis Gartman, and make a dramatic appearnace at all the key market inflection points.
The most pivotal importance of China is that it was the world’s latest financial hope. The yuan devaluation shatters that hope once and for all. The global economy looks a lot more bleak for it, even if many people already didn’t believe official growth numbers anymore. Because we’ve reached the end of the line, the game changes. Of course there will be additional attempts at stimulus, but China’s central bank has de facto conceded that its measures have failed. They just hope you won’t notice, and try to bring it on with a positive spin. Central banks are not “beginning” to lose control, they lost control a long time ago. The age of central bank omnipotence has “left and gone away” like Joltin’ Joe. Omnipotence has been replaced by impotence.
When China went the "nuclear" devaluation route earlier this week, everyone knew things were about to get a whole lot worse for an EM currency basket that was already reeling from plunging commodity prices, slumping Chinese demand, and the threat of an imminent Fed hike. With some Asian currencies already falling to levels last seen 17 years ago, some analysts fear that an Asian Financial Crisis 2.0 may be just around the corner. That rather dire prediction may have been validated on Friday when Malaysia’s ringgit registered its largest one-day loss in almost two decades, as stocks plunged and bond yields rose.
All of this raises an interesting question about the future of the US dollar. Because if an economy as large and powerful as China’s has had to concede defeat, does this mean that “King Dollar” will rule forever? No chance.
In some ways the question is not whether the renminbi is competitive or uncompetitive. The problem is that the renminbi is unambiguously less competitive than it was. This comes at a time when the Chinese economy is struggling and the stock market bubble is bursting. To all but the most PollyAnna’ish of observers that means this is the start of a major renminbi devaluation forcing the US to import even more of the world’s unwanted deflation.... Prepare for sub-1% 10y Treasury yields and another financial crisis as policy impotence is soon revealed to all.
The overnight market has been a repeat of yesterday's action, when following China's repeat 1.6% devaluation of the CNY (which was to be expected since the PBOC made it quite clear the fixing would be based off the market value, a value which continues plunging), the second biggest in history following Monday's 1.9% plunge, traders appeared stunned having believed the PBOC's lies that the devaluation was a one-off and as a result the E-Mini tumbled overnight, and is now 30 points lower from last night's PBOC fixing announcement, trading at around 2058, and far below the "magical" 200-DMA support line, which has now been solidly breached.
Despite claiming yesterday's devaluation was a "one-off", The PBOC has devalued the Yuan Fix dramatically for the 2nd day in a row - now 22 handles weaker than Monday's Fix. Offshore Yuan is trading at 4 year lows against the USD. The carnage from this dramatic shift is just beginning as global equity markets (US futures to China cash) are tumbling, US Treasury bond yields are crashing, gold is up, China credit risk is at 2 year highs, and China implied vol has exploded to 4 year highs. Ironically, China's government mouthpeiece Xinhua explains "China is not waging a currency war; merely fixing a discrepancy."
This devaluation is likely not a one-time event but rather the beginning of an ongoing and persistent depreciation of the CNY versus the USD. The embedded USD short position within the carry trades will begin to result in losses and margin calls as the USD appreciates versus the CNY, thus forcing investors to liquidate some of their positions. These trades, which took years to amass, could unwind abruptly and exert an influence of historic magnitude on markets and economies.
When a central bank tells you it’s a “one-off” event you may as well take that as a green light!