Currency/Trade Wars, Begun They Have

Tyler Durden's picture

We have written extensively over the course of the last few weeks on the increasing rhetoric from Asia over currency fluctuations and furthermore how China was playing the US and Europe off against one another in a quasi-trade-war gambit. A flurry of headlines today/tonight via Bloomberg reminded us to revisit what is also a very worrying trend in Chinese CDS (and more broadly Asian sovereigns), as perhaps sophisticated investors look for the cheapest low cost long vol trades on a non-decoupled world devolving to its lowest common denominator.

Between Carney's 'substantially undervalued Yuan' comments, record slides in Dim Sum Bonds, growing concerns over growth longevity, Japanese retail sales, Aussie home prices, Sony's troubles in currency-land, and Barclay's warning of a restart to the Yuan peg in the case of global recession - contagion and transmission channels appear alive and well in global trade.


Via Bloomberg, this morning:



followed quickly by:

Yuan Drop Spurs Record Slide in Dim Sum Bonds: China Credit

Yuan-denominated (Dim-Sum) bonds in Hong Kong are headed for record monthly loss, erasing gains for the year, as worsening outlook for global economy fuels concern China will slow pace of its currency’s appreciation.

which was 'helped' by this evening's comments:



And growing concensus that growth in China will slow significantly:

In the latest Bloomberg Global Poll of investors, most global investors and analysts, or 59 percent, foresee China will register economic gains of less than 5 percent annually by 2016.

that were around the same time as Sony's headlines hit:



...noting that "Sony doesn’t buy many components from Europe, limiting its ability to benefit from euro weakness"

Which leaves Chinese CDS (denominated in USD remember) hitting their highest levels since early March 2009 as the spread between 5y and 10Y Chinese CDS rises to record wides of 74bps

While we suspect much of the steepening and widening of China sovereign CDS is speculative revaluation/global-recession bets, Chinese CDS still has a long way to go to meet up with the other global majors in terms of its risk relative to government bonds (since CDS have the implicit currency/devaluation premium and not just technical default).

Charts: Bloomberg

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lordbyroniv's picture

4th Turning....BITCHEZ !!!!!!!!

JLee2027's picture

A strong currency used to be a good thing.

Raynja's picture

the u$ and euro are vulnerable to china still believing it is.

Pinto Currency's picture


Perhaps more simply, Chinese Credit Default Swap prices are rising because of an increased risk of inflation default.

Raynja's picture

how can you speak of "increased risk of inflation default" for china when the us is flirting with 3% on the 30yr.

the swiss didn't peg their currency to battle inflation. the chinese don't need to truely be safe to attract global currency inflows.  every decision is made on a relative basis.

in terms of cds, the entire globe is gonna feel this malaise. anywhere that the cost of insurance on securities is not rising is a good place to be buying.  that does not mean china will not attempt to emerge from it as the dominant state(currency).

Michael's picture

Have you ever lived through a complete and total worldwide bond market collapse?

I'm looking forward to my first.

cynicalskeptic's picture

I'm not.  I kind of like civilized life.  The Dark Ages were no fun - not even for the lords in their castles.

Michael's picture

All Fair Isaac data should be expunged for everybody as a prerequisite for the Epic Reset.

BigJim's picture

When, and only when, the Chinese government:

i) does not have foreign reserves measured in Trillions of USD, and

ii) does not have to worry about its people overthrowing the government

then will I worry about a Chinese economic collapse. If their economy slows significantly, their central planners will throw away their money building bridges to nowhere and cities in the sand to keep revolution away. Yes, it'll all be a massive misallocation of resources, but it'll keep the wheels of commerce spinning. And once they've depleted their reserves, and barely expanded their productive capacity, we will see the mother of all collapses there.

But not yet.

Comments, please.

bid the soldiers shoot's picture

What will the mother of all collapses look like from the pile of rubble that used to be Wall Street?

Pinto Currency's picture



Check China's inflation rate and its M1, M2 etc.increase of the money supply

PulauHantu29's picture

Strong dollar will force unemployment up a few % higher. See what happened post WWI in non-German countries.....stronger dollar discourages exports due to higher prices compared with others.....result is higher unemployment.



ZackLo's picture

Bullshit a strong currency

1.stimulates domestic demand (For foreign AND domestic goods)
2.defends resources against voltures
3.Stimulates manufacturing (through lower costs of foreign resources AND Domestic resources)
4.Stimulates SMALL BUSINESS (big business runs on credit and small business runs on Cash savings)

of course a strong currency in this enviroment implies higher interest rates and default for alot of the bigs through the need of paying back overbloughted debts with stronger money then was borrowed and therefor to big to fail would fail....But to be honest FUCKEM YOU DECIDED TO OFFSHORE THE JOBS BITCHEZ PAYBACK TIME!!!!

The way I see it is...who are you going to sell to in this enviroment trying to STIMULATE EXPORTS...what you want to throw the whole country under the bus so foreigners can get cheap goods? sounds pretty fucking retarded to me....

Ain't never seen a country in all of human history rigorously devalue it's currency take on ahitload of debt and survive in the long run....they go bankrupt from destroying the somestic economy and then become 3rd world resource stripping mines for the stronger currency countries....ever wonder why the IMF/World bank advocates 3rd world countries taking on craploads of debt and then blowing their currencies to smitherenes? you just read why...look at belarus modern example of the stripmining of the keynesian fallacy sort...

Overflow-admin's picture

Please explain this to Philipp Hildenbrand, the SNB CEO...

BigJim's picture

Government intervention in the value of a currency helps some people, and hurts others. It's as simple as that.

Take a country whose currency gains in value. If the economy has 'sticky' wages - ie, where employees expect (or are mandated by government) to earn the same units of a currency, even if that currency buys more goods, then exports will rise in price because labor costs will rise. As this 'stickiness' is the rule rather than the exception, a strong currency will hurt the exports of pretty much any country where labor is a significant component of whatever it is being exported.

However, if this situation has arisen because of trade surplus, then it means consumers in that country have greater buying power, and encourages consumption of imports. This acts as a natural balancer of trade between nations.

Now... if you weaken a currency, stickiness in wages means that exporters get a 'leg up' because there is a lag between prices going up due to inflation, and wages rising. So exporters gain at the expense of their workers' wages' value.

The USD's strength is complicated by the fact there is 'artificial' demand created for it because it is the world's reserve currency, and foreigners need it to buy oil. Oil is not only priced in USD, but most exporters demand it in payment. So (given the huge amount of money involved) the USD is much, much stronger than the country's exports would suggest, because, in effect, everything exported ANYWHERE in the world, paid for in USD, acts like an export from the US itself (at least in terms of its effect on the dollar's value).

This artificial strength is a double-edged sword, however. It gives US consumers enormous buying power; but it also makes many of its exports uncompetitive, particularly if they have a high (un/semi-skilled) labor component. Job 'offshoring' is a natural result of this; if the jobs hadn't been offshored, the companies would have eventually gone out of business anyway due to their inability to compete with countries whose currency is not being artificially inflated by payments in USD for oil (and other commodities).

It's this artificial strength that enables the US to borrow so much, incidentally, and is why TPTB in the US and its western satraps will move heaven and earth to ensure the USD remains the world's reserve currency. When a Western consumer borrows money at cheap rates to fund his lifestyle, or buys stuff for a day's wages that would cost a foreigner a week's wages, he is essentially leveraging the toil of people all over the world who produce goods sold for USD.

Bobbyrib's picture

"stimulates domestic demand (For foreign AND domestic goods)"

LOL. I do want a stronger dollar, but that statement is only half true.

r00t61's picture

For better or for worse, today, every nation's primary economic strategy is centered around export mercantilism, so strong currencies are anathema.

Probably some of these nations' leaders long for the good old days when one could simply send some stormtroopers into another nation, declare it a colony, eliminate any of the brown/yellow-skinned people that resisted, and extract as much wealth as needed, instead of engaging in lame financial/accounting skullduggery.

Clockwork Orange's picture

That is exactly what this is.  I hope everyone outside of ZH world is beginning to pay attention.  If not, they will wish they had ...

Silver Bug's picture

Indeed they have, this is going to get messy, it already has. Jim Rickards new book about the ongoing currency wars is coming out soon.

DaBernank's picture

First come the currency wars...

ZackLo's picture

Then come the trade wars....

Then come the world wars....

the tragedy of economic ignorance in the human experience..

cynicalskeptic's picture

War - boosts the economy, puts the unemployed to work (albeit as cannon fodder) and distracts the populace from their real problems by getting them all 'patriotic' and supportive of government.

In the case of the US it allows a country to offset the dropping purchasing power of its currency with blatant force of arms in simply grabbing assets (though that didn't work out so well in Iraq).

Thomas Jefferson's picture

The doom is thick tonight.  Squeeze your cheeks together gentlemen.

baby_BLYTHE's picture

Competitive devaluation and all out race to the bottom in terms of currency war has been going on for quite some time now. It is the simple reality of the government having no balls and the central banks having to cheat on the public in their place by cheapening the purchase power of the currency.

Blorf's picture

What is the point of getting CDS on US Bonds? First, they'll never default, just print the money. 2nd, if they default, whoever you bought the CDS from has long since blown up.

I should set up a company that does nothing but sell treasury bond and satellite crash insurance.

sitenine's picture

The Senate is also taking up the issue.  This was also posted on MW yesterday.  No one seemed to notice.

tmosley's picture

Great, now instead of having one room full of crazy Westerners dictating their domestic inflation rate, they will have several.

knukles's picture

Just like Europe!  Yeah!

JW n FL's picture



I hope they send those ships near Florida / Bahamas.. cause I am telling you that the salvage business is SO VERY PROFITABLE!!

They have NOTHING that I can NOT personally sink!

and their "new" radar jamming missle that can do nothing, LOL!! 2 words goal keeper and its out dated, nowa dayz!

maybe when Iran builds Aircraft Carriers! LOL!!

these BIG, Slow Ships in shallow waters are FUCKED!

DoChenRollingBearing's picture

OK, JW, you have my personal blessing to take out whatever Iran cares to send our way.  Do check on maritime law, though re salvage.  Maybe you should sink it/them in international waters...

That would make you a PIRATE however!  Obama might not like you much after your, well, executive action re the Iranian Navy, LOL...

+ a big fat green

Whalley World's picture

Dont underestimate the inventors of the Magic Carpet and Lantern.

Captain Nukem's picture

The US Navy should pull a 'Pueblo' on them. Wouldn't it be nice for the US to have Iranian hostages for a change?

I mean, if we say they were intruding within US territorial waters, it's their word against ours, right?

jonjon831983's picture

Near US Waters does not mean in US waters.  As long as they stay within bounds... well unless after an incident it becomes a he said she said kinda thing with either side saying they were/were not in territorial waters.

Also though - this event is pressure + fear.  Someone will start saying omg... these boats may have missiles on them!

MSimon's picture

Lot a USN Aircraft on the Atlantic coast. Nice to have the Iranian Navy within range.

e1618978's picture

There must have been 10 times in the last six months that you declared the currency war started...

Money Squid's picture

Now I shall declare war on you sir!

DaBernank's picture

How long was it between the Reichstag fire and the invasion of the Sudetenland, or Poland, or the start of the Blitz... when does a war actually begin?

bid the soldiers shoot's picture

If you're referring to the war with Eastasia, we haven't decided when it began. We only know that we have always been at war with them.

If you know what's good for you, you won't get too snoopy.

DaBernank's picture


bid the soldiers shoot's picture

Wanna meet me at the Chestnut Tree for a glass of Victory Gin after the markets close? :o)

LongSoupLine's picture

hmmm, and what has gold and silver done in those six months...ballears.

WmMcK's picture

+1 for your avatar -- calgon take me away.

Prometheus418's picture

Well, sadly, silver's going to go down now- I just bought some more, and you know how that goes.

DoChenRollingBearing's picture


Yeah, I know EXACTLY how you feel.  Fortunately it has always been transistory, your PMs will work out just fine.

At least 75% of the time I buy gold, the price goes straight down for a while.  But, that's OK, because I never sell.  Give it some time, your PMs will take care of you.

Prometheus418's picture

I know, or I wouldn't have bought it.  :)

I do sell, but only for useful items- never cash.  Still have to do the conversion numerically, as people don't price things in oz, but it really comes down to barter.

I don't know that I really care if it goes up or down on the "legitimate" markets.  While that does affect how much silver I can buy, it hasn't had much effect on it's relative trading value on the gray markets.

Funny thing is, I generally have tried to avoid gray markets in the past, but I'm finding that I actually enjoy transactions much more and get far better value by avoiding retail outlets these days.  Figured I'd better learn to deal with them now, when it's a choice, rather than later, when it's a necessity.

(I had originally termed this as "black market," but that's really not the right thing.  I'm talking about private sellers that don't keep records or pay sales tax, not fences and thieves.  There are plenty of people who are just fed up, and are willing to sell eggs out of the back door of a farm house, or guns off a card table- not stolen, just not part of the system.)

Whalley World's picture

Good advice,

My friend and sister called me today in a panic about their PM's and they have been in for years and are aware of the fundo's.  I have been in the mining shares since 02 but this takedown in shares has me thinking,,,, if the banks go down, who's shaes are they.  I have decided to cash in a chunk of the miners and go all in physical silver.