The biggest shift in the post Xmas/NY market break has been the PBOC struggle to shore up the Yuan and to stop the speculative outflow of capital, which has seen alternative currencies like Bitcoin soar (and flop – down 30% today!) and gold re-inflate after the December Fed rate rise.
Today saw the biggest move in the USD/CNH fix in over a decade, moving the peg from 6.9307 to 6.8668:
Which was done to close the gap with the offshore Yuan:
As the overnight deposit rate spikes to 105% – yes 105%! This mimicks the early 2016 move up to 60%:
The liquidity squeeze continued as ForexLive reports that the “People’s Bank of China has drained a net 595bn yuan from money markets via their OMOs (vs. a drain of net 375 bn yuan the previous week)”
So what’s going on with this rogue move? Is it pre-positioning before President Trump takes the Gold House?
From Bloomberg:
The turbulence represents the latest twist in a battle between China bears — who say slowing economic growth makes a devaluation inevitable — and policy makers fearing a sudden drop will destabilize the financial system. Pessimists have mostly been on the right side of the trade since a one-time exchange rate adjustment in August 2015, but sudden bouts of strength have proven painful for short sellers who need to periodically roll over their bets.
While the role of government intervention in the latest squeeze is unclear, Bloomberg News reported this week that policy makers were encouraging state-owned enterprises to sell foreign currency. National Australia Bank Ltd. says bears are unlikely to see a major reprieve any time soon as authorities keep tight control of the yuan before this month’s inauguration of U.S. President-elect Donald Trump.
The People’s Bank of China has plenty of reasons to give the yuan some short-term support. Trump has pledged to label the country a currency manipulator on his first day in office, while the exchange rate came close to breaking through the psychologically-important level of 7 per dollar earlier this week. Policy makers also want to avoid a flood of capital outflows as citizens’ annual foreign-exchange quotas reset for the new year.
This strategic positioning before the inauguration may come at a greater cost than just short sellers getting squeezed. More:
While surging interbank rates help deter bearish speculators, they also undermine China’s push to make the yuan an international reserve currency, said Michael Every, head of financial markets research at Rabobank Group in Hong Kong.
“What’s the point of being a reserve currency and having fought so hard to become a reserve currency, and then not letting anybody get hold of that currency,” he said. “China basically wants to have its cake and eat it on all fronts.”
Analyst estimates compiled by Bloomberg suggest China will eventually let the yuan continue its descent. The exchange rate will fall to 7.15 per dollar by year-end before sliding to 7.3 the following year, according to the median projections.
In the short term, though, the currency is unlikely to be a one-way wager, said Angus To, deputy head of research at ICBC International Research Ltd. in Hong Kong.
“After this round of liquidity squeeze, speculators will at least scale down short yuan bets for the next two months,” To said. “We expect the offshore yuan to stabilize at around 6.8 yuan per dollar after the market run.”
Its already there! 2017 is shaping up to be a doozy for currency traders, but hectic or even chaotic for longer term investors.