It appears the PBOC is hell-bent on destroying any trend idea for carry traders to jump on. After 4 days of strengthening the CNY... and sell-side strategists already jumping on the new trend bandwagon with trade recommendations, the PBOC surprised last night and weakened the currency fixing. It is clear from this action that the PBOC is serious about stopping the hot flows... the problem is, it has consequences. Last night saw China unable to sell its entire 1 year bond offering (even at a rate of 3.32% - dramatically higher than European or US short-dated debt). Copper prices have stumbled, USDJPY is fading and US equities doing the same for now as carry unwind butterflies flapping their wings in onshore CNY can cause hurricanes in global liquidity fed capital markets.
After 4 days of strengthening the CNY fix, the PBOC weakened it last night - throwing trend followers off completely...
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But this meant, unable to hedge the FX exposure, demand for bonds was subdued...
- *CHINA MOF FAILS TO SELL SOME 1-YEAR BONDS, TRADER SAYS
Even as they offered 3.32% (plenty of yield for anyone desparate)...
Which led to major Copper weakness...
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And the ubiquitous JPY carry over which is driving US stocks...
With increasing chatter of an earlier withdrawal from QE in the US and now the PBOC really stirring the pot, perhaps the new normal is about to morph into a status quo attempting to increase uncertainty - instead of suppress volatility - as we noted previously. [11]
As we recently noted, central banks will need more FX and asset market volatility in order to provide low rates for an extended period. The argument goes like this:
1) Low realized and implied volatility have come as a surprise to investors
2) Investors are underinvested out of skepticism that the low rates, low volatility environment will persist
3) If the central bank mantra of “low rates, low vol forever” persists in asset markets, investors will buy high beta assets and add leverage
4) Asset prices will respond much more to rates incentives than (so-called) rates sensitive sectors of the economy
5) Central banks want to keep the low rates without creating an asset bubble and will purposely induce volatility to calm speculation
And that is not priced in...
