Why All The Yawning Over The Yuan?

Tyler Durden's picture

Authored by Mark St.Cyr,

When it comes to China all the main stream media will ever cover is something in regards to a “hot topic of the day” brought about by either a political discourse, or some celebratory exhibition being observed within its boundaries. When it comes to trade, or business topics, they’ve pretty much abandoned them in total, leaving that realm for the “business/financial” outlets.

So it’s no wonder that when it comes to trade, or monetary issues most haven’t a clue. However, one would think when it came to the #1 financial headline generator that had the ability to send markets plunging reminiscent of a “Black Monday” causing global financial panic worldwide, and triggering (the first time in history) a tripping of all three circuit breakers on the U.S.’s major futures markets, while simultaneously causing the Federal Reserve for the first time in its history to openly state “international developments” as a root cause and catalyst to postpone a monetary decision that is supposedly U.S. centric only. The business/financial media would be all over it. Yet? (insert crickets here)

What is that #1 generator you might ask? Hint: The Yuan.

 

Except for places like Zero Hedge™ and a few others. When it comes to anything about China’s latest currency devaluation (whether by design or not) one would think there was a media blackout on the subject. I find that strange only for this reason: If you remember the day you woke up in August of last year thinking “Here we go again!” Where some markets had plunged over 1000 points bringing back all the fears of 2007/08. The root cause of that was: the Yuan, and its sudden devaluation.

Only after what seemed (and jawboned) like stabilization (and a note to Jim Cramer from Tim Cook on China implying “nothing to see here, move along” added in for extra measure) did the markets bounce back off the lows to then resume their monetary policy captured antics.

So with that all said for context, the question must be asked: Were you aware that the Yuan tumbled to lows not seen in 6 years? Remember – in August of 2015 the Yuan went to a level that sent markets roiling globally. We’re now well under (or above depending how you measure) that level, and falling further.

 

Do you think with what you now know that that should be a front-page headline across at least one major financial/business main stream media publication? I know I do.

Or, is that now sooooo 2015? I’m sorry, but this is not something trivial. And if you’re in business, or of the entrepreneurial mindset – not paying attention to this matter is not an option. This is where out-of-the-blue type scenarios with tremendous repercussions such as what happened in August of last year originate, then germinate. If you want proof – just think back to that August so many would like to forget.

Now some will think “Maybe there’s no concern because the politburo has it under control?” It’s a fair response, but there’s a problem inherent with the answer, or answers.

First: If the Chinese are doing it in a “controlled” type manner, it reeks of “currency manipulation” tactics for others (think U.S. presidential politics as of today) to latch onto and build support, as well as strengthen a case for retaliation. i.e., placing tariffs, etc, etc.

If you think about it from the Chinese perspective: that would mean you were openly, and intentionally goading as to fuel some version of a trade, or currency war. When you come at it using that thought process; it just doesn’t make sense. Both from a tactical standpoint, as well as political. Hence lies what maybe even a more troubling scenario. e.g., They’ve lost control.

The only other reason more troubling than the first – is the second. For it is here where things become quite precarious, as I’ve stated many times: “The currency markets are where you must keep your eyes and ears affixed. It’s where the real games are played and won.” And losing control of one’s currency has implications for all others, both warranted, as well as unintended. And it seems this latter scenario might be more on point than the former.

In just a little more than a month ago HIBOR (Honk Kong’s overnight CNH funding rates) exploded to their highest levels since the beginning of the year. The reasoning behind this speculated by many was in direct relation to the oncoming of holidays where liquidity can become scarce. It’s a valid point. However, there was another reason just as compelling with far more onerous tones which many failed to connect the dots to. Here’s how Zero Hedge explained it. To wit:

“However, the most likely explanation is that in order to force Yuan shorts to capitulate as 6.70 remains just barely within reach, the PBOC is simply continuing to squeeze the yuan shorts and raising the cost of shorting yuan, as explained last week.

 

Ultimately, the PBoC weakened its yuan fix by 169 pips to 6.6895 versus yesterday’s 6.6726, even as many were expecting the USDCNY to finally breach the 6.70 resistance level, the defense of which may have explained today’s aggressive spike in HIBOR tightening.”

Less than a week later the above was proved out correct when the afore-mentioned HIBOR surge took place. And once again, this is where that “second” answer I alluded to possibly being more of the issue that the “first” brings with it the real concern.

It would appear that China has been actively pursuing a currency strategy to keep sellers (i.e., shorts) at bay by any means available – no matter how dramatic. They have introduced measures which have exploded HIBOR nearly 200% in overnight trading scare tactics as to either punish, or decimate any bearish bets against anyone currently holding, and better yet, even thinking about placing on the Yuan.

The “magical” level implied by the politburo, which they seemed to be telegraphing in no uncertain terms, was at or about 6.70 (USD/CNH.) They’ve held this level, or manipulated aggressive tactical repercussions to ensure a stability at this level since that fateful exhibition in last August when it was evident control was slipping at best, lost at worst.

Since then they’ve shown blatant disregard as to hide their involvement if it meant holding that level through their inclusion into the SDR (Special Drawing Rights basket of currencies,) as well as ahead, during, and following a G-20 meeting. Holding that 6.70 line-in-the-sand has been assumed to be paramount. Until now….

As of this writing the current level is 6.775 and rising. At first glance that number might not look like much. But in currency markets, (especially where leverage is used in multiples that can bankrupt nations let alone “traders” in one fell swoop) it’s very concerning. For it’s far above what China has demonstrated as “acceptable” and could cause retaliatory measures (again out-of-the-blue) by the politburo that have rippling effects throughout the entire currency spectrum.

Which brings us back to those two troubling questions and answers: Are we on, or about, to see a massive currency move by China as to defend its currency against the shorts? Or, has China lost control and we are on the verge of a massive devaluation with impending monetary and trade ramifications to be felt throughout the global markets?

There is a “third” option, but I’m sorry to say – it’s worse that either the above. And that is, much like I’ve stated previous about “weaponizing the Fed” could cause intended distresses via the monetary channel.

China may have decided to strike first, not by intervening, rather, by something more innocuous, but just as devastating: By standing on the sidelines.

I’m afraid we shall find out – much sooner than later.

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jmack's picture

call me when soros is shorting the yuan

oncemore's picture

last year last time he tried to short yuan.

You remember the answer of politbureau?

NoDebt's picture

Sucks this article isn't drawing more attention because of the overwhelming coverage of the presidential election.  This is actually pretty big shit in the world of finance/investment/economics.  

I often say to many irrrelevant ZH articles "I'm glad this can't affect the price of my stawks" but this one CAN.  Ignore it at your peril.  

 

 

forwardho's picture

Indeed it is.

When coupled with the massive worldwide dumping of UST's being led by China.

It's damn near apocalyptic.

nopalito's picture

"Standing on the sidelines" = clean float? That would be a strong statement indeed.

Raffie's picture

Long as we got a USD pump, what can go wrong.

98.79. We need the dollar at 200!!!!!

Run u mindless sheeple, dump all PM and dive into the dollar.

FranSix's picture

Do people ever make their billions through calls rather than puts? I put the question to you.

NoDebt's picture

"98.79. We need the dollar at 200!!!!!"

You are young.  You will live to see this happen.

Raffie's picture

I know what happens when the dollar is this high.

Might as well crash the system and make sure it was good.

Just think what we can buy with the dollar before it goes boom.

caerus's picture

buy nat gas futures (should have been buying since june) and quit your bitching

mofreedom's picture

I will buy gas if you buy coal...at these levels that is.

No I won't.

Gas broke through support late last week, and coal is starting to stabilize to start the downturn once china get's its bucket brigade back from re education.

Even with increased LNG, upgrading and a cold winter...short it all.

Flimk.

oncemore's picture

A good question.

Yen Cross's picture

  Why all the yuaning over UST sales?  8-;

mofreedom's picture

Mark it 7. Now! NOW!!

flash338's picture

Option #4 strait from HRC... China is trying to influence the election by crashing the markets. 

gatorengineer's picture

OPtion 5 the election is providing cover a distraction to the chinese devaluing.  They known MSM will not say anything that supports a trump position.  So they can pull this shit right now and theyknow it.

Yen Cross's picture

  An microscope would be helpfull, to see how deep the crater of divergence is.

   All the macro charts looks so divergent<  Why???    </sarc>

The Bell Rang's picture

This is their reply to our war ships in their waters.......for now.

Wild Theories's picture

is it intentional or are they just stepping back and letting the market work? no idea, maybe a combination of both?

 

I do hear rumours that PBoC might cut RRR again by year's end or sometime thereabouts. I have no idea if it's true, but given the recent Chinese data and the looming dec rates meet for the fed, there certainly seems to be fuel for this rumour.

sun tzu's picture

Weaker Yuan means cheaper imports from China. It won't help much because the average US household is broke and/or too full of cheap Chinese junk already to buy much more. 

daveO's picture

Cheaper solar panels and US energy companies will feel the pain. Utilities will go bankrupt in this Depression.

yngso's picture

Yuppp, real living costs have risen, which means fewer trips to Wal-Mart. In other words double whammy for China, selling less stuff and capiyal outflows.

someup-somedown's picture

..or #4

Perhaps it is not directly aimed at the U.S at all.  And instead has more to do with maintaining stability within their local ASEAN trading region?

Jon Bong Jovi's picture

It's economic war straight up, and we won't win. The Chinese have the benefit of communism. The US is shackled by the illusion of freedom and choice, maintaing that artifice puts us at a disadvantage.

hedgiex's picture

PBoC is no different from The Fed or ECB. They are fighting fires and expeimenting. They too want their goldlilocks, like reducing the USTs while makets allow time for them to convert in paring down debts. Global markets do not exist to bow to their Politburo. The battle ensues. PBoC is a formidable but do not have all the chips to call the game. 

FinanceNewb's picture

For what it's worth... me and a buddy work in the shipping business for many years now. His companies main office is in Germany and he heard from them that Germany is now printing the Duesch mark again.... anybody else hear that???

Makes me wonder if it's true after reading the article on here a while back about Greece printing the Drahgma (spelling) and Putin telling France about it

My girlfriend is Greek and last time we went brexit happened and the year before that when we went they announced the withdrawal limit at the ATM's... we apparently have bad timing to visit her family

Fireman's picture

"back about Greece printing the Drahgma (spelling) an"

 

Actually it is the ECB that is printing the Draghi ma and that is still offficially not only Greece's IOU fiat scrip but the entire EUSSR'S IOU fiat scrip.

 

 

And not only did Russia deny the fat little fuck Hollande's lies about Russian Drachmas...so also did Varoufakis and the moron Tsipras.

 

 

back when it all looked so eaaaaaaaasy.......

https://www.youtube.com/watch?v=Afl9WFGJE0M

yngso's picture

Again a Chinese company has bought a large US one. Because of all the malinvestment, CNY keep flowing out of China, weakening the CNY.