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Now The Bad News: This Is How Much More Downside Is Left For China's Currency

Tyler Durden's picture




 

This morning's Chinese record currency devaluation, in which the Yuan was devalued by 1.9% against the USD may sound like a lot... until one considers that the Chinese currency has been pegged to the US dollar, which as reported extensively over the past year, has exploded higher not so much due to the strength of the US economy but due to expectations of what may be the Fed's biggest mistake in recent years: a rate hike which will assure the US economy's tailspin into recession.

In effect what the PBOC did earlier today is inform the world it would no longer stay pegged to a Fed whose monetary intentions are complete lunacy for a mercantilist exporter, one whose economy is getting crushed as a result of the tight linkage between the USD and CNY, and even if it means massive capital flight as the opportunity cost, so be it. Furthermore, considering that the CNY was until recently the second most expensive currency according to Barclays, it is amazing it took Beijing this long to pull the plug.

 

So how much more devaluation is in store for the CNY? Well, if one believes the PBOC, today's intervention was a "one off." The problem is that just like every central bank in modern history, the Chinese central bank is lying.

Here is Goldman with a quick and dirty observation of what one can expect:

According to the PBOC press release, the unexpected change in fixing mechanism today was in response to the prospective Fed liftoff, which has the potential to cause further strengthening in the USD and capital flow volatility. The CNY on a trade weighted basis has appreciated sharply alongside the USD strength, and is still about 15% higher than a year ago after today’s move (Exhibit 1). However, we think a FX move of today’s scale, while significant by the standard of CNY’s historical movement, is unlikely to give a strong boost to growth.

In other words, today's "devaluation" is a tiny pinprick in the grand scheme of the CNY's revaluation since the USD surge started in 2014. This becomes especially apparent when one sees the impact of the CNY's peg to the soaring USD, and last night's shocking announcement, in context.

So to answer how much more downside in the CNY there is, now that the PBOC has thrown in the towel and will aggressively devalue the currency, the answer is somewhere between 10 and 15% more if China wishes to regain its competitive status as of just last summer!

Which means an unmitigated disaster for US, European and Asian, exporters whose only lifeline was China's FX patience.

Patience, which just ran out.

And for all those wondering why stocks are red today, the answer is simple: in a zero-sum trade world, the market now demands much more QE from the ECB, BOJ and, soon enough, the Fed itself because the deflationary export deluge which China just unleashed will send the 10Y solidly below 2% in the coming days unless some "western" central bank somewhere does or says something to remind the market who is in charge..

 

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Tue, 08/11/2015 - 10:44 | 6413719 lehmen_sisters
lehmen_sisters's picture

Please keep devaluing, i need more lead based bullshit for my downtown loft. 

Tue, 08/11/2015 - 10:45 | 6413726 ZippyBananaPants
ZippyBananaPants's picture

You can blind fold them with dental floss

Tue, 08/11/2015 - 10:55 | 6413770 Publicus
Publicus's picture

Change China to Gold and read this article again.

Tue, 08/11/2015 - 10:57 | 6413781 zuuma
zuuma's picture

PBOC chairman, Lei Ying Lo, screamed "Chow Mai Dong" , prior to going on vacation.

His Secretary, Wai Yu Hai Ding, is unsure why the Yuan  is plummeting.

Reserve ratio charts are now Captioned "Lao Zi" or just one step up from the lowest rating

of "Lin Ching".

 Chinese economy = Wai U Shao Wong

Tue, 08/11/2015 - 11:55 | 6414027 Save_America1st
Save_America1st's picture

How much did phyzz gold and silver increase in terms of yuan after this happened? 

Tue, 08/11/2015 - 12:02 | 6414059 SirBarksAlot
SirBarksAlot's picture

+ .44% at 12:00 noon. 

I guess we know where you'll be having lunch.

Tue, 08/11/2015 - 13:04 | 6414384 y3maxx
y3maxx's picture

If/when China or any country hits the currency war wall....whey will look to their only alternative.....real War.

Tue, 08/11/2015 - 11:01 | 6413803 Latitude25
Latitude25's picture

What are you doing here?  Eveyone voted for you to shut up.

Tue, 08/11/2015 - 11:14 | 6413852 Publicus
Publicus's picture

I'm sorry for your losses.

Tue, 08/11/2015 - 10:57 | 6413785 pods
pods's picture

But if they keep devaluing, how are they gonna buy all those Chevys?

This is all an orchestrated clown show where nations petition the secret round table groups (think X- Files) to allow them to devalue their currencies. Competitive devaluation.

This is not a currency war. This shit is all orchestrated, save for some tin pot dictators in Africa or S. America.

China is about to implode due to leverage. They petition the owners and they allow them to devalue, thus keeping the system going.  

Think of it as having gas. Some times you lean on the left cheek to get one out, and sometimes you shift to the right one. Anything to relieve some of the pressure.

pods

 

Tue, 08/11/2015 - 11:08 | 6413827 LawsofPhysics
LawsofPhysics's picture

The Chinese government is not interested in having a "reserve currency", they never have been.  They are interested in total world domination, period.  Being allowed to to whatever the fuck you want to your own currency and people has distinct advantages in this regard.

Tue, 08/11/2015 - 11:14 | 6413855 RadioactiveRant
RadioactiveRant's picture

The Chinese like other sheeple will take all the bullshit if they see things improving overall, the 1bn might become restless when they see the shit they've worked for turn to dust.

Tue, 08/11/2015 - 10:48 | 6413733 Captain Debtcrash
Captain Debtcrash's picture

No question the US has problems but I find it interesting that we are talking about how much downside the yuan has considering how many in alt financial media have been calling for just the opposite.   The US will enter the currency war soon enough, current events are just interesting. 

Tue, 08/11/2015 - 12:17 | 6414111 SuperVinci
SuperVinci's picture

Gee...another awesome blogger with an awesome blog advocating his awesomeness in all things financial. Great. Thanks. Got it.

Tue, 08/11/2015 - 13:03 | 6414379 KnuckleDragger-X
KnuckleDragger-X's picture

A monetary steel cage death match between the two largest economy's, time to get out the popcorn and tequila......

Tue, 08/11/2015 - 10:45 | 6413720 Headbanger
Headbanger's picture

Yep, as I said here before..  Massive epic biblical crushing deflationary implosion ahead!

And there's not enough QE left in all the central banks now to do anything about it.

Tue, 08/11/2015 - 10:46 | 6413729 XAU XAG
XAU XAG's picture

"One Off"

 

My thoughts when I read that this morning..................yea ................right

Tue, 08/11/2015 - 10:47 | 6413738 Soul Glow
Soul Glow's picture

The yuan is worthless, but then again, so is the dollar.

Tue, 08/11/2015 - 11:00 | 6413796 pods
pods's picture

Exactly. And the point for those who issue these currencies (banks) is to keep their system going. So when pressure builds in one area, you relieve pressure.

Competitive devaluation FTW.

pods

Tue, 08/11/2015 - 10:51 | 6413744 JustObserving
JustObserving's picture

Come on, you 1.3 billion Chinese -  Buy gold and silver with your fast depreciating Yuan before you have to pay 10% to 15% more.

What the world will get is another $11 trillion in QE and the countries with ZIRP and NIRP will double from about 15 to about 30 in just the next two years.

Since ’07, $11 trillion of global QE, $57 trillion of more debt

http://investmentwatchblog.com/since-07-11-trillion-of-global-qe-57-tril...

Tue, 08/11/2015 - 11:00 | 6413794 Soul Glow
Soul Glow's picture

Now that's good advice.  We also know why China reported buying gold before the yuan devaluation.  Buying gold with a depreciating currency looks desperate.

Tue, 08/11/2015 - 11:24 | 6413890 Angelic Upstart
Angelic Upstart's picture

1.3 Bullion Chinese.

Tue, 08/11/2015 - 10:49 | 6413745 hedgelessWhoresMan
hedgelessWhoresMan's picture

Rut Row

Tue, 08/11/2015 - 11:15 | 6413861 Soul Glow
Soul Glow's picture

Remember all those US politicians that wanted China to stop their "currency manipulation" and depeg?  Well they got they're wish.  Let's see how the US economy performs now.

Tue, 08/11/2015 - 10:50 | 6413747 thunderchief
thunderchief's picture

I think this is great!

Stocks, realestate,  and now their currency in the toilet.

On top of that rejection from the IMF SDR..

Time to buy more gold China.. Not much left.

Tue, 08/11/2015 - 10:50 | 6413748 thunderchief
thunderchief's picture

I think this is great!

Stocks, realestate,  and now their currency in the toilet.

On top of that rejection from the IMF SDR..

Time to buy more gold China.. Not much left.

Tue, 08/11/2015 - 10:56 | 6413778 Latitude25
Latitude25's picture

Treasuries.  The Chinese will run to treasuries.  OK.  Now do you understand?  LOL

Tue, 08/11/2015 - 10:53 | 6413762 Kina
Kina's picture

so the under reporting of gold was meant to help soften the Yuan, didn't work so....

Tue, 08/11/2015 - 10:54 | 6413768 I Write Code
I Write Code's picture

So the price of gold (and silver, and copper?) in yuan must be headed for the moon.

Tue, 08/11/2015 - 11:59 | 6414049 SirBarksAlot
SirBarksAlot's picture

The gold price in US $ is certainly moving back up. 

Tue, 08/11/2015 - 10:55 | 6413772 Impoverished Ps...
Impoverished Psychologist's picture

Come on people, we all know fiat currencies are just a tool to keep the sheeple on the conveyor belt - driving the wheels along. The dog and pony show must get ever more complex and immersive  with more Ishit, more Kardashians and more gibberish to keep those people out there doing their menial jobs day in, day out...

 

Tue, 08/11/2015 - 10:55 | 6413773 RadioactiveRant
RadioactiveRant's picture

All this deflation is going to be great for over indebted western nations.

Tue, 08/11/2015 - 11:01 | 6413782 buzzsaw99
buzzsaw99's picture

methinks you may be underestimating the magnitude of the eventual move. I could see it going all the way back to 2003 or even 1999 levels.

Tue, 08/11/2015 - 11:00 | 6413797 Confundido
Confundido's picture

"...what the PBOC did earlier today is inform the world it would no longer stay pegged to a Fed whose monetary intentions are complete lunacy..."? I don't know about this...To me, this sounds like a concerted effort by the PBOC and the Fed to keep US Treasuries from getting puked....but, hey, I have been wrong before...

Tue, 08/11/2015 - 12:04 | 6414069 old naughty
old naughty's picture

you're not wrong, on the one-off.

The rest, we will know soon.

Tue, 08/11/2015 - 11:04 | 6413817 SirBarksAlot
SirBarksAlot's picture

Help me here.  This is huge, right?

Tue, 08/11/2015 - 11:12 | 6413848 Jethro
Jethro's picture

So what happens when a pound of television is less than a pound of chicken?

Tue, 08/11/2015 - 11:21 | 6413883 Xatos
Xatos's picture

Eat moar tv.

Tue, 08/11/2015 - 11:18 | 6413872 Bull Bear Nice Pair
Bull Bear Nice Pair's picture

The yuan was devaluced only 1.9%. All the effects are psychological for the time being. There will be little real effects to the economy if ther is no more action from POBC.

Tue, 08/11/2015 - 11:27 | 6413904 SirBarksAlot
SirBarksAlot's picture

Thanks for that input, Mr. Bernake.

Tue, 08/11/2015 - 11:24 | 6413893 SirBarksAlot
SirBarksAlot's picture

Remember the Swiss Franc and the Euro?

And just in time for China to start selling gold on its own market next month!

Tue, 08/11/2015 - 11:42 | 6413961 Hongcha
Hongcha's picture

Wi wei tu lo.

Tue, 08/11/2015 - 11:46 | 6413976 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413977 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413978 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413979 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413980 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413982 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413983 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413984 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413985 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413986 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413987 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413988 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413989 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413990 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413991 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413992 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:46 | 6413993 maitrepoulet
maitrepoulet's picture

China's also got the Hong Kong dollar to hedge with.

Tue, 08/11/2015 - 11:50 | 6414011 maitrepoulet
maitrepoulet's picture

Holy fuckin duplicate posts. Sorry.

Tue, 08/11/2015 - 12:12 | 6414094 Ghostdog
Ghostdog's picture

"Donger need food!"

Tue, 08/11/2015 - 12:17 | 6414114 pgroup
pgroup's picture

Inscrutable, those Chinese.

Tue, 08/11/2015 - 13:16 | 6414457 Sages wife
Sages wife's picture

Will be interesting to see the impact on the North American housing market. As in Vancouver and San Francisco.

Tue, 08/11/2015 - 15:24 | 6415175 asdfzxh
asdfzxh's picture

wrg

Tue, 08/11/2015 - 21:17 | 6416517 fowlerja
fowlerja's picture

So the answer to the Dow's 200 point fall was the 1.9% devaluation of the Chinese yuan...so if China needs to be more competitive at a 15% devaluation..this is approx 7 times greater than today's devaluation... which means another 1400 point Dow drop..yikes...batten down the hatches...

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