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China Currency War Contagion Spills Out, Leads To Global FX Heatmap Bloodbath, PBOC Intervention

Tyler Durden's picture




 

Overnight, as previously reported, the world was shocked to find that following the record 1.9% devaluation yesterday, China's ongoing attempt to bring its currency into balance was not a "one-off" thing as the PBOC desperately wanted to spin it, but tumbled by 1.6% again just this morning to a 6.3306 fixing, the lowest since October 2012.

 

That was just the start of the bad news: shortly after the second devaluation in a row, China reported retail sales (10.5%, exp. 10.6%) and Industrial output (6.0%, exp. 6.6%) which both missed expectations. As Goldman summarized "July activity data came in below market expectations. IP growth moderated meaningfully from June both in yoy terms and on a sequential basis. In conjunction with other recent weak data such as the July trade report, these indicators (which senior officials would have had earlier) help explain the move weaker in the currency over the past two days."

More:

3Q GDP growth faces significant further downward pressures as the economy will hit a bump in August and September. Beijing and its surrounding regions, the most important heavy industrial zone in the country, will restrict construction, production and transportation between 20 August and 4 September. All previous such restrictions (Olympics in 2008, Youth Olympics and APEC Summit in 2014) were associated with weak growth. With the A-share equity market range-bound amid intensive government supports, the extra 0.5ppt direct contribution from heightened financial sector activity to first-half GDP growth will likely fade too.

 

Today's data at least partially explains the two very unusual moves by the PBOC yesterday: (1) the decision to allow the currency to depreciate, (2) releasing very strong (at least on the surface, see China: July money and credit data above expectations, but underlying growth not as strong as headline numbers suggest, Aug 11, 2015) July monetary data very early in the morning. The moves were likely intended to be a preemptive measure to show the market the economy has a brighter side too and the government is taking actions to support growth.

 

We expect the government to take other loosening measures, including further RRR cuts, more supports for policy banks, more government bond issuance, and pressures on local governments to take actions to spend idle fiscal deposits to support FAI growth. Slightly higher recent CPI inflation may make policymakers a bit more reluctant to ease via (benchmark) rate cuts than through the other approaches -- in the past, policymakers have seemed to view benchmark rates as more closely linked to inflation outcomes, though we think their impact on the economy is relatively modest.

 

And so overnight the world realized that there is much more devaluation to come,  which in turn led to a tidal move higher in the EURUSD as the European banks who had been short the EURCNH (probably the same ones that were long the EURCHF in January ahead of the SNB shocker) continued covering their exposure, and in turn pushed the EURUSD well above 1.11, while the CHF continued to tumble alongside the USD at least when it comes to Europe.

In Asia, and local emerging markets, however, it was a different FX story eniterly. To wit:

  • HONG KONG DOLLAR DROPS 0.1%, SET FOR BIGGEST FALL SINCE MARCH
  • AUD/USD SLIDES 1.2% TO 0.7216, LOWEST SINCE APRIL 2009
  • INDIAN RUPEE DROPS TO LOWEST LEVEL SINCE SEPT. 2013
  • RINGGIT WEAKENS BEYOND 4/USD FOR FIRST TIME SINCE 1998

A more detailed look courtesy of Bloomberg:

  • Onshore and offshore yuan lead declines among Asian currencies after China weakens yuan fixing by more than 1% for second successive day; sovereign bonds rise in Australia, while interest-rate swaps climb in Malaysia.
  • Aussie falls against dollar; Australia’s second-quarter private-sector wage growth was lowest on record
  • Won touches weakest level since Oct. 2011; South Korea’s jobless rate fell to 3.7% in July from 3.9% prior month; nation is closely monitoring foreign-exchange market as China’s yuan devaluation, along with Fed’s possible rate increase, is raising volatility in financial markets: Finance Minister Choi
  • Rupiah touches weakest level since 1998; Bank Indonesia sees rupiah’s recent declines as excessive, causing currency to trade far below fundamental value, Governor Martowardojo says; central bank will remain in market to stabilize rupiah, bonds, sees second-quarter current-account deficit at 2.3% of GDP; nation announced changes to President Widodo’s cabinet; government to guard economic fundamentals in responding to market losses, Finance Minister Brodjonegoro says
  • Rupee drops; India’s industrial production probably advanced 3.5% in June from year earlier after increasing 2.7% in May: Bloomberg survey; consumer prices may have risen 4.4% in July following 5.4% increase in June: separate survey; both sets of data due today
  • Peso declines; Philippines has sufficient liquidity, remittances to buoy peso amid yuan drop, central bank Deputy Governor Guinigundo says
  • Dong slumps; Vietnam widens dong’s trading band to plus/minus 2%

But perhaps the best way to visualize what is going on in China relative to the USD is with a simple heatmap:

 

The contagion from the deflation-exporting currency war promptly spilled over into Europe, where German 2 Year bonds dropped to a record -0.29% while the 5 year went negative for the first time since June 1. For now at least the 10Y is still above 0.60%, although expect that to slide as well: moments ago the 5Y5Y inflation swap rate fell to under 1.70%, the lowest since April 28, and confirming that the next deflationary wave in Europe has arrived.

All of this was as we expected and explained would happen yesterday.

Perhaps the only surprising wrinkle is that as the Offshore Yuan was crashing, first by 2%, then by 3%, the PBOC intervened.

A sudden drop in USD/CNH from 6.5900 to 6.5600 came after suspected onshore USD/CNY selling by agent banks, according to an FX trader based in North Asia. This was the PBOC making itself felt in the offshore market. In fact there were at least two interventions in the Yuan market that we can see as of this writing. As a result the Yuan fell 1.0% to 6.3870 per dollar after dropping by as much as 2.0% ealier before the PBOC got involved.

Furthermore, it appears that much more intervention is in store:

  • CHINA SAFE SAID TO ASK BANKS TO LIMIT USD PURCHASES BY SOME COS

More from Bloomberg:

  • China’s forex regulator issued notices to banks on Wednesday, asking them to limit dollar purchases by some cos., according to people familiar with the matter.  Order doesn’t affect those having valid trade-related demand, said the people, who declined to be named as the matter isn’t public
  • Some cos. were making large dollar purchases that may have been related to exploiting the difference in exchange rates between the onshore and offshore yuan markets, according to one person
  • SAFE also gave verbal guidance on the matter to some banks on Tuesday, two people said. Affected transactions could be in either spot, forwards or options markets, according to one person

WSJ adds more:

China intervened on Wednesday to prop up the yuan in the last minutes of trading, according to people familiar with the matter, in an apparent attempt to prevent an excessive fall in the currency as the authorities seek to give the market more say in setting the exchange rate.

The PBOC then instructed state-owned Chinese banks to sell dollars on its behalf in the last 15 minutes of Wednesday’s trading, according to the people. The result: The yuan jumped about 1% in value against the dollar in the final moments of trading, bringing it to a level where one dollar would buy 6.3870 yuan.

And if China's hilarious attempts to stabilize its stock market were mostly a sideshow for foreigners, now that China is actively managing its currency from the market standpoint, all those smiles have promptly turned to frowns, as suddenly nobody has any idea what to expect out of China.

The end result of the second day of Chinese intervention: US equity futures are currently down 1.2% to 2058, far below the 200 DMA, while the 10Y is at 2.07%, and on its way to a 1 handle in the coming days if not hours.

 

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Wed, 08/12/2015 - 05:48 | 6417432 Headbanger
Headbanger's picture

It's fucking hilarious!

China kills Yuan which slashes export prices which puts moar Americans and Germans out of work

Which slashes Chinese goods bought by Americans and Germans

Which cuts China's exports moar.....

As I said....  Massive epic biblical crushing deflationary implosion dead ahead!!

Followed by a massive comet impact

And an ice age..

But awesome snowmobiling and ice fishing all year long!

Wed, 08/12/2015 - 05:50 | 6417435 1stepcloser
1stepcloser's picture

"deflationary implosion dead ahead"

 

So there will be less, devalued currency around?

Wed, 08/12/2015 - 06:13 | 6417442 Headbanger
Headbanger's picture

Immense, gigantic,  titanic, Old Testament liquidity crisis dead ahead when assets rehypothecated 10 times over become worthless

Resulting in hoarding cash declared worthless when Feral Reserve implodes into oblivion.

Followed by another massive comet impact

And MOAR ice age

But awesomer snowmobiling across oceans !

And polar bears everywhere.. Lots and lots of polar bears..

Ice zombies too!

Sounds like the start of another great post apocalypse film  I'll call "Zero Henge"

Or "Planet of the Polar Bears"..   Nahh....  ho bout  "Rise of the Ice Zombies"

Wed, 08/12/2015 - 06:25 | 6417460 random999
random999's picture

I like that, rise of the ice zombies!

When I was a kid people used to exchange for dollars when they went traveling to other countries as they where globally quite accepted. Seems to be a good idea to bring a few goldcoins nowadays. Just in case something snaps its good to be able to make your way home.

In worst case u'll probably be able to buy a old stinky fisherboat for a few oz and sail your way home with it.

Wed, 08/12/2015 - 06:54 | 6417494 Killer the Buzzard
Killer the Buzzard's picture

Dong slumps!

Wed, 08/12/2015 - 07:14 | 6417542 zirp_to_infinity
zirp_to_infinity's picture

Shouldn't that have been Dong droops, or Dong shrivels?

Wed, 08/12/2015 - 07:21 | 6417549 aPlayer
aPlayer's picture

Tickmill trading desk tweeted today that PBOC may be looking to devalue the CNY by 15-20% gradually over 1-2 months to make it more favorable for the exporters on a trade weighted basis. We could be just in the beginning of devaluation.

Wed, 08/12/2015 - 06:47 | 6417481 Infinite QE
Infinite QE's picture

Long blow torches to deal with ice zombies.

Wed, 08/12/2015 - 06:52 | 6417491 negative rates
negative rates's picture

Long light bulbs!

Wed, 08/12/2015 - 06:57 | 6417503 Stormtrooper
Stormtrooper's picture

How about "Dawn of the Rice Zombies"?

Wed, 08/12/2015 - 07:40 | 6417579 stant
stant's picture

Ice station zero hedge

Wed, 08/12/2015 - 09:17 | 6417898 roadhazard
roadhazard's picture

Are you sure you can't get Nostrodurmus in there somewhere. And maybe some space aliens bringing messages of doom.

Wed, 08/12/2015 - 09:35 | 6417968 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

OK granted, but what's the downside?  Winter is coming, please pass the sunscreen.

Wed, 08/12/2015 - 05:40 | 6417428 Ham-bone
Ham-bone's picture

China seems very unlikely to end devaluation here. China is collapsing (commodities consumption, shipping rates, housing crash, stock market crash, credit contraction, etc.) and the peg to the dollar isn’t helping one bit and a continued period of devaluation is almost a sure thing…to be followed by Brazil, Russia, Vietnam, Thailand, etc. etc.

Still, China’s problems and their fundamental reasons for devaluing are based in the same mistaken models of infinite growth as the West…slamming into reality of negative “growth” (aka, decline)…China danced while the music played like the rest in the West but now the music has stopped….what comes next is really scary for East, West, North, and South alike.

Here’s what I think is driving the PBOC and like scenarios for developed nations central banks…

http://econimica.blogspot.com/2015/08/the-chinese-mirage-no-different-than.html

Wed, 08/12/2015 - 05:43 | 6417430 buzzsaw99
buzzsaw99's picture

Perhaps the only curious wrinkle...

they prefer the water torture method.

also, you can't exploit the difference in exchange rates between the onshore and offshore yuan markets, only we can exploit the difference in exchange rates between the onshore and offshore yuan markets.

Wed, 08/12/2015 - 05:47 | 6417433 Byte Me
Byte Me's picture

How about some info on electricity consumption and freight transport TD?

The propoganda retail sales and Ind OP are about as trustworthy as anything out of the BLS.

Wed, 08/12/2015 - 05:48 | 6417434 klayton biggs bee
klayton biggs bee's picture

Honest question....Is this good news or bad news?

Wed, 08/12/2015 - 06:03 | 6417443 Bearwagon
Bearwagon's picture

On a long enough timeline this is good news. Not so much in the shorter run. But you should think for yourself, and to aid you I recommend remembering two basic rules:
1.) Good news is bad news
2.) The medium is the massage (okay, that was originally the "message", but McLuhan approved this, too)

Wed, 08/12/2015 - 06:01 | 6417436 Slowdrip
Slowdrip's picture

Lookout...

Wed, 08/12/2015 - 06:00 | 6417439 kiwimail
kiwimail's picture
Chinese yuan loses 2 percent?  Pity the poor kiwis, the NZ dollar has lost 25% this year already!
Wed, 08/12/2015 - 07:48 | 6417601 conscious being
conscious being's picture

Now I see why local markets have kiwi apples. Very good too considering the distance.

Wed, 08/12/2015 - 06:12 | 6417449 B2u
B2u's picture

Sum Ting Wong

Wed, 08/12/2015 - 06:24 | 6417459 ParkAveFlasher
ParkAveFlasher's picture

Wi Tu Lo

Wed, 08/12/2015 - 07:22 | 6417551 B2u
B2u's picture

Ho Li  Fuc

Wed, 08/12/2015 - 06:14 | 6417451 buzzsaw99
buzzsaw99's picture

And if China's hilarious attempts to stabilize its stock market were mostly a sideshow for foreigners, now that China is actively managing its currency from the market standpoint, all those smiles have promptly turned to frowns, as suddenly nobody has any idea what to expect out of China...

i think china would love to pump up the stock market to increase domestic demand however they have to shake off the foreign carry traders first who do nothing for aggregate demand because they are all fascist maggots who do nothing but take.

Wed, 08/12/2015 - 07:51 | 6417609 conscious being
conscious being's picture

Really buzz? I thought it was all about the openning wrestling maneuvers in the dolla take down death match.

Wed, 08/12/2015 - 06:15 | 6417452 Monetas
Monetas's picture

Italy has all it's gold .... and is proud to show and tell .... prolly adding to their stash !

Wed, 08/12/2015 - 06:21 | 6417458 Keyser
Keyser's picture

They should be careful about flaunting their gold stash... Libya and Ukraine are just two examples of what happens when something evil wants your gold... 

Wed, 08/12/2015 - 06:57 | 6417502 Killer the Buzzard
Killer the Buzzard's picture

Smaug.

Wed, 08/12/2015 - 08:04 | 6417649 Motasaurus
Motasaurus's picture

Smaug aint got nothing on Goldman Sachs. 

Wed, 08/12/2015 - 06:45 | 6417475 Infinite QE
Infinite QE's picture

'cept that Italy is in worse shape than Greece.

Wed, 08/12/2015 - 06:53 | 6417493 negative rates
negative rates's picture

That was very well said my friend.

Wed, 08/12/2015 - 06:34 | 6417468 Joe A
Joe A's picture

Don't want to sound pessimistic but currency wars lead to trade wars lead to real wars. It is a race to the bottom and at the bottom is bad news. There is a limit to growth after all, especially when that growth turns out to be artificial and full of bubbles.

Wed, 08/12/2015 - 06:38 | 6417472 ZippyBananaPants
ZippyBananaPants's picture

You can blind fold them with dental floss, never gets old!

Wed, 08/12/2015 - 06:45 | 6417478 Felix da Kat
Felix da Kat's picture

The spiral of economic demise has begun. Like a child's spinning top beginning to wobble, the entire house of cards is crumbling because the Fed's poorly thought out strategy has left it with no bullets. Another round if QE Four ? It would only be a band-aid. I predict a herd of bears will stampede down Wall Street today as the Fed futilely jockeys to re-stabilize world markets.

Wed, 08/12/2015 - 06:46 | 6417479 Infinite QE
Infinite QE's picture

Lots o'more Chinese folk will be buying r'adioactive property in CA whilst the tuned in Kalifornians flee inland.

Wed, 08/12/2015 - 06:47 | 6417480 J Pancreas
J Pancreas's picture

Paging Jim Rickards... After reading both his books and tons of ZH is any of this actually surprising to people who have been around these parts for awhile?

Wed, 08/12/2015 - 06:50 | 6417485 B2u
B2u's picture

History books written by the leading country of the world....China...will talk about the failure of the great pretender...a country once known as the United States of America.  The history books will point to the failures of the people and how they relied on Republicans and Democrats to "fix" all that ailed them.  The history books will talk about how the demise of the United States accelerated under President Bush and was completed by President Obama.  sigh.... 

Wed, 08/12/2015 - 06:57 | 6417504 negative rates
negative rates's picture

Dubious you'll find anyone to write those books no matter how truthful the information.

Wed, 08/12/2015 - 07:20 | 6417548 B2u
B2u's picture

Huh?  The books will be written in Chinese.  English will be a minor language because all the English speaking countries collapsed.  Don't believe it can happen...oh...you must get back to  watching Dancing With the Stars..

Wed, 08/12/2015 - 07:46 | 6417598 negative rates
negative rates's picture

Must suck to be you, you can't get out and comfortable with the head and neck W/O a deep understanding of the english language, cuniform or whatever  it is they use has been proved to be a doomed language in that respect. Hence the crushing slanted eye syndrome plaguieng all eastern civilizations. I think your interpretation or premise is faulty to core, no i'm certain of it.

Wed, 08/12/2015 - 08:07 | 6417660 Motasaurus
Motasaurus's picture

Are you kidding? China was British, until Mao, and then they kept just enough of it to work a backdoor into the heartland when they "gave back" Hong Kong in '98 (though, honestly, the return began with Nixon).

The books will be written in English because Rule Britannia!

Wed, 08/12/2015 - 07:02 | 6417513 mijev
mijev's picture

Always gets to me when I hear that the Dong is sagging, despite stimulus to try and make it firmer.

Wed, 08/12/2015 - 07:02 | 6417514 Irishcyclist
Irishcyclist's picture

I follow the commercial activity of automative makers BMW and Mercedes

Both of these companies enjoyed huge earnings in China throughout 2000's because demand for their product was massive.

 

I noticed in the last 12-24 months though that both companies had been warning that demand for their product was stalling and falling.

With falling demand and no dearer product because of the currency devaluation, countries and firms exporting in to China will face further turbulence.

Wed, 08/12/2015 - 07:30 | 6417562 pudge94
pudge94's picture

Heard stories on the radio yesterday that either BMW/Mercedes (I forget which) has a plant in Indiana making cars strictly for import into China.  Sounds like a terrible time to start this.

Wed, 08/12/2015 - 07:32 | 6417566 pudge94
Wed, 08/12/2015 - 07:45 | 6417592 Irishcyclist
Irishcyclist's picture

I hope that the jobs there are safe and secure.

 

In the meantime even the MSM picked up on BMW's warning about demand cooling in China

http://asiancorrespondent.com/132909/outgoing-ceo-of-bmw-warns-that-chin...

Wed, 08/12/2015 - 07:05 | 6417525 Jersey_Mountaineer
Jersey_Mountaineer's picture

Funniest quote I read all day yesterday... The US Treasury wants China to stop devaluing its currency and let market forces determine its value.  I almost fell out of my chair.

Wed, 08/12/2015 - 07:15 | 6417541 pitterrier
pitterrier's picture

What is an RRR cut?  Rumibi Reserve Rate?

Wed, 08/12/2015 - 07:15 | 6417543 dumbStruck
dumbStruck's picture

 

Maybe things are not altogether as they seem with this sudden outbreak of devaluation. It is dangerous to jump to conclusions about your opponent. Perhaps this currency war outbreak will take an unexpected turn. I don't know, but I'm watching gold closer than ever right now.

“Appear weak when you are strong, and strong when you are weak.”

“Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.”

“In the midst of chaos, there is also opportunity”

Sun Tzu was Chinese.

Wed, 08/12/2015 - 08:32 | 6417733 Bemused Observer
Bemused Observer's picture

Just remember folks...none of your shit is worth what you think it is.

If it's priced in fiat, you have no clue of its value.

But you will, soon.

Wed, 08/12/2015 - 10:57 | 6418319 Jafo
Jafo's picture

Interesting that Iceland is bright green in that heat map.  I don't suppose the Powerz would like us to notice that.

Thu, 08/13/2015 - 01:17 | 6421258 onmail
onmail's picture

Plenty of fish all around

Plenty of geo-energy all around

Wed, 08/12/2015 - 10:59 | 6418328 Falconsixone
Falconsixone's picture

 The world was shocked .... lol

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