Yuan

As long as the Chinese government hates foreign hedge funds and speculators, no one will make a killing buying the yuan. (CYB).

In a direct affront to congressional scapegoaters and idiots everywhere, the EU's Junker has just hit the tape saying that not only is it wrong for the CNY to follow the USD's erratic movements, but that he does not believe the CNY is too strong. Well of course, it isn't: relative to the dollar, it is at parity. And looking at what the money printing idiot is doing it will get much weaker, which will make life for Europe an even bigger hell. Disturbingly for German exporters, Juncker said he does not expect concerted action to stop USD fall vs. EUR. Lastly, Junker notes what everyone knows - there is too much volatility between the main global currencies. This is also known as the initial phase in currency war. Just wait until India, and finally China, gets involved in devaluation. That's when it gets really "volatile." But when you have tapped all the organic growth in a failed economic system, what else can you do to avoid the hudnreds of millions of pitchforks politely demanding one's scalp.

Just because somehow it is the Yuan's fault that America has exported its entire manufacturing industry over the past 30 years to lower cost countries, our idiot leaders have decided to take the next big step toward an all out trade war. The House of Idiot Representatives has approved legislation designed
to combat the manipulation of currency by China that results in
unfavorable trade conditions for the United States. As CNN reports, the
legislation, which authorizes the Commerce Department to impose duties
on imports from countries with undervalued currencies, passed by a vote
of 348 to 79. Somehow, because it was framed as a "jobs issue", everyone in Congress went full retard and confirmed they have not the first clue about how Economics actually works. But yes, please revalue the Yuan: the next thing will be exploding prices at Wal Mart, which have so far successfully masked the fact that the US has been exporting staple product inflation. We wonder how those same "workers" on whose behalf this law was allegedly passed will feel when their bill anywhere is double what it used to be... Not to mention that their currently unemployed status will certainly not have changed.

"For the Chinese, restarting the creeping revaluation of the renminbi has many benefits. Near the top of the list is gently moving its manufacturing base toward higher value added items and shifting production from servicing exports to satisfying domestic demand. Way down the list is appeasing the international critics of Chinese policy. The promotion of the domestic market is already underway, but the pace will be glacial – at least from the point of view of bank traders and US politicians – taking at least a decade to have a major impact on the composition of the Chinese economy. And there is no guarantee that any shift is coming, as the Japanese economy remains basically unchanged despite the dramatic increase in the value of the yen. We can only hope that the authorities in Beijing have a more adaptive and global view than those in Tokyo have shown and will adjust their banking and financial support system to integrate the renminbi and the Chinese economy with that of the West. Although the renminbi could rise to the 4.00 area by the end of this decade, the impact of this move will be felt inside of China, not outside. Furthermore, we can be sure that the Chinese leadership will do its best to manage this process in a way that has the most positive feedback for the Chinese society. Although the stronger renminbi will be a boon for China’s neighbors in Asia, it offers no help to the US or Europe." - John Taylor

The latest IMF Currency Composition of Official Foreign Exchange Reserves report was just released. In the quarter ending March 31, the biggest relative drop occurred in central bank holdings of Dollars, declining as a percentage of total reserves from 62.2% in Q4 2009 to 61.5% in Q1 2010. This is the lowest ever relative holding of US Dollars by foreign banks. Oddly enough, the euro was not the biggest beneficiary of this loss of confidence in the dollar (it also declined on a relative basis by 0.1% as a % of total holdings to 72.2% in Q1), but the "Other" currency category. We assume that the Chinese Yuan is the dominant currency in this particular basket. Other reserves increased from 3.1% of total to 3.7% in just one quarter. Central banks are starting to rotate holdings out of Dollars (and after this quarter, certainly out of euros) and into non-traditional, non-developed currencies. Are China and Russia slowly becoming reserves?

Yesterday's mega news on the CNY depegging, which went so far as to make headlines out of something as mundane as the PBoC yuan fixing, has now been fully priced in. And before we put the matter to rest, we would like to present two diametrically opposing opinions on this issue: one from Goldman's Sven Jari Stehn, which is full of contained optimism about the future of the world, and one from Gary Shilling, who in a Bberg TV interview, says that the Chinese decision could not have come at a worse time, and that it risks destabilizing the precarious global balance achieved at the cost of so many trillions in stimuli.

The market just added one more bank to its daily intervention watch. The PBoC, which left the CNY fixing unchanged from Friday at 6.8275, is now being tested by the market, which is trying to determine what the real trading band is. At last check, the USDCNY was at 6.8125. So far the daily band has been pushed beyond 0.002% and the PBoC has not yet intervened, or at least not in a manner comparable to that we have grown to love and disrespect from the SNB. In the meantime, just so there is no confusion, Former Chief Executive of the Hong Kong Monetary Authority, Joseph Yam says the "Yuan may appreciate or depreciate in short-term." Well, that now makes it all clear.

On Sunday, the People's Bank of China (PBOC) has ruled out the one-off revaluation that US politicians had sought. For now, analysts still expect the yuan to slowly rise. Meanwhile, the decision by China should not have come as a surprise as there are several major risks should China implement a faster yuan move as favored by many.

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.

What do you do when your last multi-trillion stimulus is expiring and its effects no longer generate asset bubbles as you once did? Why, you launch another multi-trillion stimulus of course, although if you are the US you call it something funky like Pennies for Prosties, Benjies for Bodyrubs or something comparable. China has no problems with nomenclature so it calls it how it is: as Bloomberg observes, "China will announce in August a new stimulus package of possibly 4 trillion yuan ($586 billion), the China Business newspaper reported on its Web site, citing unidentified sources. The plan, from China’s National Development and Reform Commission, will likely cover nine industries including information technology and new energy, the report said." So much for monetary prudence. At this point all economies will spend money into overdrive until each and every economy (that can print its own currency) simply implodes into a Keynesian supernova.

Gary Shilling is now firmly in the anti-China contrarian bandwagon. In this interview with Bloomberg's Erik Schtazker the legendary investor, who called Japan's lost decade when everyone was just as bullish on Japan as Goldman is now on China, Shilling shares the same view on Chinese record excess capacity as Hugh Hendry did some months ago: "You can't trust the [Chinese] numbers... They have kickstarted their economy in the last year - it's a stop go economy, they can do it fast, they don't have to worry about EPA audits, they just let the bulldozers roll when they want to build a new road or whatever. The point is they build an awful lot of excess capacity and the question is how are they going to use it because American consumers aren't buying their exports the way they used to and their domestic economy isn't that strong... Chinese consumer spending is 36% of GDP and is a declining share over the last two decades. They don't have a a big enough middle class. In China there were 110 million people with over $5k per capita income, enough to give them discretionary spending but that was only 8% of the population. In this country it is 80% of the population." And on the yuan: "If they took off all the controls and Chinese could invest abroad, the yuan would probably go down because people would want to diversify... I think the political leaders are aware of that possibility they sure don't want to be pushed around, and Obama made a huge in trying to push them again. Remember China was dominated by European in the last century and they want to run their own country." While we completely agree with Schilling, we believe that the current transformation in US society, which is in the last throws of contract abrogation, in not paying mortgage and credit card bills, we may well see a last push in Chinese imports, after which any disposable income in the US middle class will plunge and will take the US economy down with it as well. The problem, as we have repeatedly pointed out, the cash return on such "assets" as iPads and Kindles is zero, not nearly enough to pay down 39.95% APR credit cards.

Over the last ten years, the Renminbi (RMB) or yuan, has been slowly gaining influence in the markets that surround mainland China. And about one year ago Hong Kong introduced a new trade settlement that allowed Hong Kong business’ to use the RMB as a trading currency. In a China Daily interview, Dr. Billy Mak, Associate Professor in Finance at Hong Kong Baptist University believes the yuan overtaking the dollar will happen in three phases.

In what could be a first step to appeasing the US and its requests for CNY revaluation, Caijing has reported that China may be considering expanding the daily yuan trading band. The yuan currently fluctuates up to 0.5% around the central CNYUSD parity set by the PBoC - today, for example, the CNY was stronger by 1 pip from 6.8264 to 6.8263. As reported by Market News, citing an
unidentified Chinese government source, "If the central bank does not want to see a quick rate hike, a
better way to fight inflation would be to expand the daily yuan trading
band to allow the yuan to appreciate properly." One interpretation of this development is that China, anticipating a delay of the Treasury report widely expected to brand China a currency manipulator, will placate the US just marginally and split the baby in the middle, by allowing a trading band expansion. Of course, this will do nothing to actually revalue the Yuan, devalue the dollar and boost US exports, but it will allow the Obama administration to save face and say "look, China made a concession" which the teleprompter will explain is an indication that the Obama administration now has the upper hand in Sino-US negotiations, followed by a round of applause from yet more to be soon unemployed people.

Permabull Jim O'Neill of Goldman Sachs surprises everyone by issuing yet another missive after being dead wrong on the Renminbi a month ago, and very vocally so. The surprise is not in his persistent frothiness (the man is a singularly male version of an undoubtedly female A. Joseph Cohen after all), or his attempt at mea culpa'ing (we wonder what sport instrument Roach would recommend using on Mr. O'Neill), but that Jim is still at Goldman after the entire Red Devils fiasco. Oh, and speaking of sport, O'Neill joins the Krugman-Schumer team in providing most unwelcome policy advice to China.

Just a headline from Reuters for now:

U.S. SENATE BILL TO BE UNVEILED TUESDAY THREATENS STIFF PENALTIES ON CHINA IF IT DOES NOT REVALUE ITS CURRENCY-CONGRESSIONAL AIDES

We are confident China gets Reuters too.