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How Much More Faith In Central Banks Is Left?
Carry traders just got their fingers burnt by central bankers, again.
As Bloomberg reports,
The People’s Bank of China’s decision to cut its daily reference rate by 1.9 percent triggered the yuan’s biggest one-day drop since the nation ended a dual-currency system in January 1994. That’s bad news for carry traders, drawn to the yuan by its stability. Until Tuesday’s surprise move, the central bank kept it in a tight range of 6.1887 to 6.2205 against the dollar since the start of April, according to prices compiled by Bloomberg.
The PBOC’s decision is just the latest misfortune for these traders.
A Deutsche Bank index of carry trades had already dropped to 510.31 Monday, from 546.71 at the end of last year, after the Swiss National Bank ditched its exchange-rate cap in January, sending the franc soaring and wiping out returns.
“There are people who have seen the implausibility of China devaluing -- because they said they wanted stability -- as justifying owning the currency in one form or another, simply for carry,” said Kit Juckes, a London-based strategist at Societe Generale SA. “It’s another domino that has fallen.”
Investors in carry trades borrow in one currency to invest in another where interest rates are higher. They profit both from the rate differential and any appreciation in the purchased asset. Higher volatility can hurt returns because adverse price moves can wipe out the benefit from the pick-up in rates.
Twice in eight months is enough to shatter anyone's illusion that central banks really have control. But perhaps just as worrisome for the central-bank-omnipotence meme, is how last night's action was translated to the masses (as Epsilon Theory's Ben Hunt explains)
Everything under heaven is in chaos; the situation is excellent.
? Mao Zedong (1893 – 1976)
A quick email on China’s currency devaluation last night. The news itself is big enough, but it’s the Narrative that’s developing around the devaluation that has my risk antennae quivering like crazy. What do I mean? I mean that initial media efforts to portray the devaluation as a one-time “adjustment” that’s in-line with prior policy have been overrun by stories of “shock” and disjuncture. This is true even within Rupert Murdoch’s various media microphones, which tend strongly to toe the Beijing party line. Moreover, the devaluation is not being described in Western media as Chinese “stimulus”, which it surely is and would send markets higher if portrayed in this light, but as Chinese “currency competition” and as a sign that the growth problems in China are more severe than Western central bankers would like to believe. Or more precisely, would like to have YOU believe.
What’s the Truth with a capital T about Chinese growth, Fed intentions, and the future price of growth-sensitive assets like oil? I have no idea and neither does anyone else. Seriously.
But what I do know is that the Common Knowledge about Chinese growth – what everyone thinks that everyone thinks about Chinese growth – is dramatically changed for the worse today, and it’s a change that will accelerate unless the Narrative shifts. That could happen. I still have nightmares about how the Narrative around the ECB’s OMT program shifted from “Draghi’s Blunder” to “Draghi’s Bold Move” within a single day in the pages of the Financial Times in the summer of 2012. But unless and until that Narrative shifts, the path forward for the Fed just got much more perilous.
And that’s why the 10-year US Treasury is at 2.12% as I write this note. Unless and until that Narrative shifts, the path forward for oil and any other global growth-sensitive asset or security just got much more perilous. And that’s why oil is at $43 as I write this note.
One last point, focused on what’s next for China. As with everything else here in the Golden Age of the Central Banker, my crystal ball is broken. But I think that I’ve got the right lens for viewing China and its political dynamics, and you can read about it in two Epsilon Theory notes: “The Dude Abides: China in the Golden Age of the Central Banker” and “Rosebud”.
As mentioned earlier 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.
* * *
Change is afoot.
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You better sound off that you love the Hymie Bankers.
If FAITH doesn't work
there is always FORCE
Zero hedge
Left?
You've got to be shitting me right?
Dominos may not be falling yet, but some are definitely wobbling.
I'll say it again: The collapse is underway, and accelerating.
I'm inclined to agree. Lehman/AIG sized (or bigger) collapse immanent. Someone's derivative book is about to blow.
Now for my favorite quote always given by the smartest people in any room when they are proven dead ass wrong:
"Why, this changes everything we thought we knew!"
As if that is absolution for being an ignorant fuck and leading other ignorant fucks down the wrong path.
P/E seems like a long ago dream when judging what stocks to buy. I knew a fellow who became a millionaire following that.
Of course that counted a work-long investment in stocks that made sense, the phone company, railroads, GM even.
So when he added all the worth of those stocks and his retirement, his house, he and his wife had a million dollars.
That was 36 years ago.
The Banksters caused the Great Depression and Tribal members like Bernard Baruch snapped up companies for pennies on the dollar. They captured a LOT of hard-working Americans wealth in that manner. Today it is even easier. Perhaps we might call this the FINAL GATHERING of the goyim's wealth, small as it is...
Bernard Baruch... now there's a name you don't hear very often.
Involved in just about everything from financial dispossession of the masses to the Manhattan Project and the quest for One World Government. My suspicion is that history is about to repeat itself yet again...
How much faith does the drug addict have in his dealer? Does is really matter as long as he get his fix?
The problems really start when he doesn't.
Something is going on within the last few minutes in forex. Anyone know what it is?
It's also effecting futures.
I have sensed a great disturbance in The Force.
Check out the top-kick article on ZH right now. China just forcibly devalued for the second time in two days. You have your answer.
I feel so sorry for them. Betrayed by Central Bankers. Must have hit them hard, never having that happen before. Enormous long runs of profits, disrupted. Worse when they can't depend on LIBOR and the other riggings.
Poor bastards. Reduced to inferior coke and $1000 prostitutes.
My take is, they will unwind and head somewhere else. Most players didn't start this trade yesterday, and most likely had good profits. The fact a "stable" and almost guaranteed trade was taken off the table is positive for other/similar currencies.
QE to the moon and back!
Gold and Silver look pretty good considering the shit storm in markets the past 15 years.
Not to mention ZIRP and currency debasement.
Hey and dont forget all those stacks upon stacks of bitcoins.
I just love the feel of a bitcoin passing thru my fingers. I always win coin flipping contests with them too...always headz.
No, this is a one-time adjustment...
Uh wait.
"China is not waging a currency war; merely fixing a discrepancy."
Now we are good. Everything fixed!
I'm really happy to be shitfaced long TZA right now. You can FEEL this shitshow groaning and cracking and popping, with pieces falling off around you.
https://www.youtube.com/watch?v=eem7d58gjno
or
https://www.youtube.com/watch?v=7X0hq0ug9q4
Finance "ministers" and faith.
Seems like currency bugs require much more religion than gold bugs.
A brave new world
There's no more faith.. well until they start QE4