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China "Loses Battle Over Yuan", And Now The Global Currency War Begins
Almost exactly seven months ago, on January 15, the Swiss National Bank shocked the world when it admitted defeat in a long-standing war to keep the Swiss Franc artificially weak, and after a desperate 3 year-long gamble, which included loading up the SNB's balance sheet with enough EUR-denominated garbage to almost equal the Swiss GDP, it finally gave up and on one cold, shocking January morning the EURCHF imploded, crushing countless carry-trade surfers.
Fast forward to the morning of August 11 when in a virtually identical stunner, the PBOC itself admitted defeat in the currency battle, only unlike the SNB, the Chinese central bank had struggled to keep the Yuan propped up, at the cost of nearly $1 billion in daily foreign reserve outflows, which as this website noted first months ago, also included the dumping of a record amount of US government treasurys.
And with global trade crashing, Chinese exports tumbling, and China having nothing to show for its USD peg besides a propped and manipulated stock "market" which has become the laughing stock around the globe, at the cost of even more reserve outflows, it no longer made any sense for China to avoid the currency wars and so, first thing this morning China admitted that, as Market News summarized, the "PBOC lost Battle Over Yuan."
That's only part of the story though, because as MNI also adds, the real, global currency war is only just starting.
And now that China is openly exporting deflation, and is eager to risk massive capital outflows, the global currency war just entered its final phase, one where the global race to the bottom is every central bank's stated goal. Well, except for one: the Federal Reserve. We give Yellen a few months (especially if she indeed does hike rates) before the US too is back to ZIRP, maybe NIRP and certainly monetizing even more things that are not nailed down.
Here are some additional views from Market News that summarize what just happened in China:
China PBOC Loses Battle Over Yuan; War Continues
The People's Bank of China said Tuesday that the yuan will from now on better reflect market forces, but the central bank is unlikely to tolerate sustained depreciation so long as it feels it needs to maintain financial stability and avoid spooking capital flows.
The near-2% depreciation engineered via the central parity fixing on Tuesday was described by the PBOC as a "one-off revision." The yuan's real effective exchange rate has risen nearly 15% over the past year and the central bank said it wanted to correct this deviation. Tuesday's depreciation was presented as a reform step designed to improve the central parity fixing mechanism.
But the fixing rate, and the bank's explanation, rocked regional markets as investors sold off on concerns that China will now competitively devalue the yuan to help prop up its flagging economy. Domestic asset prices also weakened because a weaker yuan risks worsening capital outflows, leading to tighter onshore monetary conditions and possibly destabilizing the financial system.
A person familiar with exchange rate policy accepted that the move increases depreciation speculation but said the authority will continue to stabilize the yuan.
"The yuan may keep falling as the market needs time to understand but the central bank will keep the exchange rate stable because it is in China's interest to do so," he said.
Another person stressed the market reforms imbedded in Tuesday's statement and said "we cannot simply understand the yuan central parity from this depreciation angle." Tuesday's announcement comes ahead of an International Monetary Fund decision later this year on whether to include the yuan in the basket used to value its Special Drawing Right.
Traders in the interbank market noted big dollar sales by large institutions at around 6.3000 on Tuesday morning and suggested these banks could be acting on the quiet orders of the PBOC.
"It's the PBOC's invisible hand -- it looks like this is the first line of defense now," said a trader with one of the Big Four state banks. Another trader said the PBOC may step up intervention for now, but said the longer-term outlook is for a more market-oriented -- and presumably weaker -- yuan.
The central bank has kept the yuan stable for months in a quiet peg to the U.S. dollar precisely because of its concerns about capital flows and the need to maintain financial system stability.
It has faced mounting pressure from within the bureaucracy to allow the yuan to weaken to help support the export sector, MNI reported last week. July's dismal trade report -- showing an 8.3% y/y plunge in exports -- made the PBOC's ongoing resistance to depreciation untenable.
The new method for fixing the morning central parity rate does promise greater input from market forces. The PBOC instructed market makers that their central parity quotes "should refer to the closing rate of the inter-bank foreign exchange market on the previous day, in conjunction with demand and supply condition in the foreign exchange market and exchange rate movements of the major currencies."
But those bids will still be calculated by the PBOC for publication by the bank at 0915, giving the bank considerable scope to manage the exchange rate according to China's economic needs.
The PBOC may have lost the battle on the State Council, but it will continue fighting the war to maintain currency stability, particularly in the run-up to a Federal Reserve meeting next month which many now expect will result in the first increase in the federal funds rate in nine years.
All of the above, incidentally, was explained in our post from March 6 titled "How Beijing Is Responding To A Soaring Dollar, And Why QE In China Is Now Inevitable"
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...and gold just popped to $1117.
I assume the CHF is the one in bits & pieces in the cartoon.
Tylers up early frothing at the mouth!
I think we are all giddy waiting for next month, will the Federal Reserve slit its own wrists vertically, or the dollar's?
So how do currency wars end?
Let me guess.
Real wars.
China. You can't win this war!
And the Yiddish media is having a fit, because their Hebrew FED masters are upset.
Agree, the real war. Cyber attacks on financial, defense, etc.
Absolutely true. The next global war will be almost entirely asymmetric. Small fry will get completely wiped out as the big guys slug it out. Big guys are going to suffer too.
Gold and silver are becoming the last real currency standing.
Buy all you can.
There's gonna be a load of suicides this week-end... tens of billions in losses... LOL
Maybe in the orient.
China exporting deflation is based on the assumption that there is international demand for Chinese product.
Is there international demand out there for Chinese product? Time will tell.
So much for world currency status....... but then, should we be surprised? China is too dependent upon extracting more labor out of their massive labor force for less Yuan.
Went into HHGregg last Friday around lunch to pick up a washer I ordered online for a rental house. I notice the parking lot was empty....but when I went into the store, it floored me. There were about 5-6 workers who practially swarmed me when I walked in. When I told them I was their for a pickup, they all left me and told me to go to CS. There, the staff was somewhat rude and non-helpful. Got my item, helped the one loader guy load it on my truck, and left, promptly. What else I noticed? Not another soul was in the store. No one.
I can't believe they are still around.
I worked at Best Buy during college, sold TVs, computers and eventually did car audio install for 4 years + my masters because I hated the average customer. Best job I ever had -- if I could do that and get paid what I earn now -- I'd be doing that forever.
Anyways, back when I was selling computers and TV's I had idiot customers "well you know this is 10% cheaper on Amazon, can you match that?" "No sir, unlike Amazon, Best Buy has to pay for the store, the electricity and my salary to which I just spend 2 hours describing the differences between various TVs and technologies." "Yeah that doesn't matter. Thanks for your help, if you can match Amazon's price difference including sales tax I'll buy it from you -- if not I'll buy it from Amazon."
:-/
Same shit different day with PC computers. I hated that part of the job. Seriously the worst shit ever. Just like HHgregg Best Buy's days are numbered because the average consumer is a complete and utter moron. Couple that with minimum wage increases, and Best Buy and hhGregg will be closing doors left & right. They could barely make money competing with amazon paying warm bodies $8.25 an hour to read the sales tags to customers. Double that -- forget about it.
But that aside -- the average consumer is a moron. Both are going the way of Circuit City.
I should've scrolled down just a bit before I posted! I pity people who buy from Amazon all the time. I only go there for the product reviews.
I remember right before I left for lawl school -- but you had people trying to return Amazon purchases to Best Buy for either store credit or cash, because shipping on a 72" TV is fucking expensive.
Regrettably for higher-ticket items, Best Buy keeps track of serial numbers throughout the supply chain, and some of BB's preferred suppliers on consigment (LG for example) gives BB the serial ranges for identical products for Amazon & Wal-Mart etc., etc., etc.,
Explaing to some MAF old fucker why we would not return the TV because he bought it from Amazon was awesome. At first he tried to deny it, and then I showed him serial number tracking system. He then told me it doesn't matter because its identical to the ones BB sells and we could just in-turn sell it. Apart from warranty issues, I enjoyed explaining to him why we are not a pawn shop. He told us to take the TV back or he would never shop at Best Buy again and buy everything at amazon instead. I shit you not.
I could, and maybe I should write a book. Almost 8 years in Best Buy (started in 2003 in high school and quit in 2010) -- I could go on forever.
Customer Service would call me when they had a "fiesty one" as I had a very subtle way of telling the customer "fuck you" without getting fired myself. I came close a couple times, but they never were able to axe me. That was my favorite part of my job.
.
Experienced the same thing at Best Buy a couple weeks ago during my lunch hour. Maybe it's the lunch hour time that's slow, but I would have thought just the opposite.
Best Buy needs to drop consumer low-margin shit. How they make any money when the profit margin on a 32" Ínsignia TV is $3 per unit -- is completely beyond me.
Unfortunately, Best Buy never sell the best products when I am shopping. I can buy a bedroom TV from them but not a TV for Home Theater. Same with speakers, amplifiers and processors. The store should be called "Quite Good Buy" but it rarely has the best buy.
They do pretty good with their $40 HDMI cables.
Thats true. If however you pay $40 for a Rocketfish HDMI cable you need your head checked.
You can always buy a Monster cable for $80.
Made with top secret mojo juice.
Dont forget the BOSE speakers with the hidden specs.
Sensitivity, SPL, frequency response, impedance, etc.
Those are the things wankers care about.
Same here, except it's been almost every store. Menards- Dead, Lowes-Deader than dead, Walmart has been pratically emtpy even the FSA hasn't been there much lately. Only stores that seem to be busy are Dollar General and Rural King. Wheels are coming off the bus.
Stopped at the local Dollar General for rechargable AA's.
This is a rural community and not a rich one so DG is the most popular store in town. The register girl and I had a nice undisturbed chat because the store was empty.
She said her busy 7 hr. shift had 10 customers and most of them are kids buying pop on the way home from school.
YMMV. One local store is literally in a field by a gas station, just opened up last week, it's busy purely because it's the closest general merchandise store within 20 minutes of a lot of people. The other is in a small town and the line at the register is backed out the door with the local ebt crowd. These stores are likely busy because people don't want to spend the gas money to drive to town but need to grab some essentials.
Sears, lonely Sears the other day....
No reserve currency for you!
Ahh here we go again with stabilitee.
China will soon have another cultural revolution. I now feel bad for the crying farmer. Godspeed sir, just remember that the real enemy are the banks.
All wars are bankers wars.
Good post ZH. Not trying to pretend to be a sage about these things (you know how much you paid for this advice), but as I look at the new terrain, post Yuan devaluation, I have revised my strategy slightly.
I now think that while investors should continue to accumulate PM's as a portion of their portfolio because prices at these levels are tempting, the funds that they are trading might now be better allocated to shorting the Nasdaq 100 (or the S&P 500 for the more faint of heart) than longing PM's over the next 6-18 months. In other words, for a while, US equities are more overvalued, than PM’s are undervalued.
I say this because with the collapse of trade and the resultant economic contraction, we may initially see increased deflation of asset prices, including PM's for a while yet. However, during this timeframe, stock earnings will collapse (as we have already witnessed to a more limited degree) and the long overdue dramatic correction of US equity prices will begin. Because of the stress in the economy, I think that there will be enough stress liquidation of PM's to offset increased fear demand, at least until a capitulation in the stock market occurs, at which time more stock/bond investors will throw in the towel and become buy-side PM investors.
Another factor that influenced this shift in my view is political. I believe the Trump phenomenon (who still does not have my endorsement, given his cabalist links), and the ludicrous attempt by Fox to squelch it at the last debate, is further evidence of cabalist desperation, and that they will continue to "burn the furniture" at an accelerating rate in a futile attempt to protect the dollar and front run for their insider trading cronies.
This means the likelihood of more mass paper PM dumping in the short run, which could put a lid on PM pricing. While they have also been trying to prop up of the equities markets while suppressing PM’s, the total amount of capital (and/or assumed derivatives risk) required to continue that exercise, given the total size of the equities markets (as compared to the PM markets) will become overwhelming, and they will not succeed.
This is good news for the American peoples of white European descent in the long run, because wealth has been redistributed to the cabal via paper asset channels. Destruction of this paper wealth will disproportionately hurt the cabal.
Timing will be difficult, but I think we need to see more capitulation in equities and bonds before a sustained bull market in PM's is possible.
Hmmm - and apparently this is just the start of a longer term devaluation trend and will certainly lead to more immediate capital outflows.
That has to be bullish for west coast Real Estate right? More Canadians and Americans will be priced out of home ownership in their urban centres and no government willing to do anything about it; "Let the market decide" is their mantra. But then who's market or currency decides?
Widgets will only come down in price if the discount is passed on to consumers.Right now,for what it costs U.S. manufacturers to make things in China,the consumer is still getting ripped-off.It's all about corporate profits and ripping-off ordinary working people on huge mark-ups.
Time for the SDR - One ring to rule them all.
https://www.youtube.com/watch?v=gsqWQjyFiGg