China Nukes Yuan Shorts: PBOC Raises FX Fwd Reserve Requirement

In the clearest signal yet that the PBOC is drawing a "red line" to further currency devaluation, moments ago the PBOC announced it is raising the reserve requirement for FX forwards to 20%. 

As the PBOC notes, "due to factors such as trade frictions and changes in international exchange markets, there have been some signs of procyclical fluctuations in the foreign exchange market." As a result, the move is "aimed at preventing macro financial risks" with the central bank adding that it will "take counter cyclical measures to keep FX markets basically stable based on market conditions." The new forward foreign FX risk reserve requirement will become effective as of Aug. 6th.

Stated much simpler, what the PBOC is doing is nuking Yuan shorts and forcing a marketwide FX short squeeze.

Commenting on the move, Nomura's x-asset strategist Charlie McElligott said that when this action from the PBoC was previously enacted back in Oct ‘15, the market interpretation was that this shift was "…seen as an effort to restrict dollar purchases when the yuan is weakening."  So here we go again, “REVERSE ENGINES.”

Reuters is also reporting further “interventionary” commentary from the PBoC regarding willingness to take further “counter-cyclical” measures to stabilize FX markets.  

"In the even-larger macro-sense, this is unambiguously a relief trade for risk-assets via the powerful “weakening USD” impact it can have—ESPECIALLY Emerging Markets and Commodities, which have again recently traded VERY sloppy" according to McElligott, who adds that "we see S&P futures rallying powerfully, as “stronger USD” has been a pure “tightening” of financial conditions."

The Nomura strategist accurately concludes that "the PBoC just “eased” U.S. financial conditions."

And sure enough, as the Yuan slides, S&P futures are surging.

Full statement below (google translated):

The People's Bank of China decided to adjust the foreign exchange risk reserve ratio of the forward sales business to 20%.

Since the beginning of this year, the foreign exchange market has been operating steadily. The RMB exchange rate has been based on market supply and demand. There has been a rise in the market, the flexibility has been significantly enhanced, the market expectation has been basically stable, and cross-border capital flows and foreign exchange supply and demand have been generally balanced. Recently, due to factors such as trade frictions and changes in international exchange markets, there have been some signs of procyclical fluctuations in the foreign exchange market. In order to prevent macro financial risks, promote the stable operation of financial institutions, and strengthen macro-prudential management, the People's Bank of China decided to adjust the foreign exchange risk reserve ratio of forward sales from 0 to 20% from August 6, 2018. In the next step, the People's Bank of China will continue to strengthen the monitoring of the foreign exchange market. According to the development of the situation, it will take effective measures to carry out countercyclical adjustments, maintain the smooth operation of the foreign exchange market, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

Today's move is a mirror image of what the PBOC announced on September 8, 2017 when the Yuan tumbled after the PBOC cut its FX reserve requirement from 20% to 0%, sending the Yuan tumbling after the currency had hit its highest level in years. Back then, the offshore Yuan tumbled from 6.45 to below 6.51 in hours...

Obviously the reversal of this move would have just as dramatic a move in the opposite direction, and sure enough, after hitting a one year low of 6.91 against the dollar, the CNH has surged massively, rising as high as 6.825 before finding some support.

And yet, as some traders already noted, there will be a cost to China in terms of the impact of what is effectively policy tightening will have on domestic liquidity.  Specifically, as Citi notes, "the local economy and asset markets will struggle to cope with that and it is not a sustainable policy."

And while Trump may be content that for now, at least, the PBOC has finally drawn a real line in the sand for further devaluation, he will be double happy that China no longer will permit Yuan devaluation as a currency war response to rising tariffs, effectively handing Trump leverage in the trade war, if only for the time being.

Comments

FactDog Fri, 08/03/2018 - 07:47 Permalink

The reality is that Chinese production can be redirected to Europe and Russia at huge discount prices.

As well we are underestimating the growing demand for consumer goods in China and in India.  

This trade war will not end well for the West.

Free This FactDog Fri, 08/03/2018 - 08:06 Permalink

Ouch, some people just got their faces ripped off!

Reuters is also reporting further “interventionary” commentary from the PBoC regarding willingness to take further “counter-cyclical” measures to stabilize FX markets.

In other words, the central planners are shitting themselves!!!

In reply to by FactDog

Cognitive Dissonance GoHillary2016 Fri, 08/03/2018 - 08:33 Permalink

In the face of MASSIVE central bank interventions, why anyone other than trading floors with lots of money backing them would play the FX market is beyond me.

Then again, after 10 years of accommodating CB policy, why wouldn't the world expect free money to continue to rain down.

Welcome to the early stages of the global thermonuclear currency wars.

In reply to by GoHillary2016

lock-stick JRobby Sat, 08/04/2018 - 01:14 Permalink

ONE whackjob obsessed SPAMMER -- with numerous log-ons!!!

•• Free This  (same WHACK JOB -- used to be "Mr Hankey" -- also banned)

•• sanctificado  (DON'T CLICK THE LINKS!!! --  Biblicism SPAMMER -- banned as powow/Wadolt/ravolla/lloll/pier/etc.)

•• More Sun (it's the JOOS!! -- whack job extraordinaire)

•• Annanuki  (another imaginary friend)

•• Jumanji1959 (another imaginary friend)

•• Adolfsteinbergovich  (another imaginary friend)

•• Cryptopithicus Homme  (another "imaginary friend")

 

spamming ZH for seven years --- dozens and dozens of banned log-ons

 

ONE DEEPLY DISTURBED INDIVIDUAL 

 

Write to the Tylers ::  abuse@zerohedge.com

In reply to by JRobby

Kayman FactDog Fri, 08/03/2018 - 10:12 Permalink

"Reality" ?

Europe doesn't want any more Chinese shit. They've been applying tariffs on that crap.

India hates China, and the Russian economy is tiny and has all the Chinese crap they can handle already.

Ask your handler at China Military Intelligence for better lines.

Yuan, Shanghai, Gold, Copper.... all down big time.....Yup, China's got this elephant by the balls.

In reply to by FactDog

MoreFreedom Kayman Fri, 08/03/2018 - 11:08 Permalink

Chinese businesses, owned by the politically connected, are highly leveraged and are typically subsidized.  Things are starting to get interesting as many of these businesses will be unable to make their debt payments on time.  Then it becomes the politically connected businessmen, vs. the politically connected bankers in China.  It's no surprise China is suppressing bets in the foreign exchange markets by Chinese looking to hedge their positions against the Chinese currency from collapsing.

In reply to by Kayman