As we noted earlier [7], the most surprising development out of this mornings repeat rout in the Chinese currency was not that it happened: after all as we laid yesterday out there is at least 10-15% in immediate downside [8]left for the Yuan...
[9]
... but that shortly before the market close, China's central bank intervened via "at least one major Chinese state-owned bank sold large amount of dollar shortly before market closed, prompting rapid gain in yuan, according to two traders at onshore banks" Bloomberg reported adding that at least one state bank continuously sold dollar until USD/CNY reached around 6.38.
[10]
We bring this up because while we noted it when it happened just after 3am local time...
Yuantervention
— zerohedge (@zerohedge) August 12, 2015 [11]
...it is now being observed by the mass medias such as the WSJ:
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 ... 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.
This in turn has led to a bounce in risk assets and bond yields, and a reversal in the selloff in some Asian assets on hope that the PBOC is back in the picture. This is ironic because far from suggesting the PBOC is "in control", it merely shows just how confused and ad hoc this yuantervention really is: first the PBOC shocks the market with the two biggest devaluations in history, then it proceeds to intervene and push the Yuan far stronger, whiplashing all traders in the process.
But the biggest problem for the PBOC is that interventions or not, the CNY has a long way to drop: indeed, we said 10-15% more yesterday, and now Reuters confirms as much [12]:
China's move to devalue its currency reflects a growing clamour within government circles for a weaker yuan to help struggling exporters, ensuring the central bank remains under pressure to drag it down further in the months ahead, sources said.
The yuan has fallen almost 4 percent in two days since the central bank announced the devaluation on Tuesday, but sources involved in the policy-making process said powerful voices inside the government were pushing for it to go still lower.
Their comments, which offer a rare insight into the argument going on behind the scenes in Beijing, suggest there is pressure for an overall devaluation of almost 10 percent.
"There have been internal calls for the exchange rate to be more flexible, or depreciated appropriately, to help stabilise external demand and growth," said a senior economist at a government think-tank that advises policy-makers in Beijing.
"I think yuan deprecation within 10 percent will be manageable. There should be enough depreciation, otherwise it won't be able to stimulate exports."
* * *
"Exporters face very big pressure, and China's economy also faces very big downward pressure," said a researcher at the commerce ministry's own think-tank, which recommended earlier this year that the government should unshackle the yuan.
"The yuan depreciated only slightly versus the dollar, but it has gained sharply against other currencies. China's economy and trade are no longer strong; why should the yuan be strong?"
We wish the PBOC the best of luck as it tries to channel the Yuan to a "just right" level without blowing up countless carry trading freeloaders in the process, and pushing FX volatility off the charts just as it did with its "bull in a china store" approach to "fixing" the bursting stock market bubble. It will need it.
