Yuan selloff accelerates as PBOC cuts deep

The daily fix for Chinese Yuan has come in at 6.5960 versus the previous level at 6.5569, a near 400 point cut!

The selloff has accelerated, with a steeper trendline on the USDCNH pair:

Where will it end? What’s the uncle point for the Chinese authorites? Somewhere around 6.70 but it could overshoot to the 6.90 level easily if the trade war widens:

From Bloomberg:

According to Zhang Ming, a senior fellow at the Chinese Academy of Social Sciences (CASS)  6.7 is the level that could spur some action from the PBoC, either by suspending devaluing operations, or by taking direct actions to dampen volatility.

It’s also a possibility for the PBoC to use their ample FX reserves, or to reintroduce a counter-cyclical factor into the way uses its fixing formation mechanism to actively support the Yuan.

Comments

  1. BrentonMEMBER

    I’m wondering at what point Trump will start making noise.

    PS the extra Becker coverage is going down a treat

  2. So this whole trade war thing – so long as it does not lead to an actual war, it has to be good for the global environment right? I mean less trade means less shipping which means less whales ran over and less CO2 released. If it ends up with an overall slowdown in consumption, that also has to be good for the environment, doesn’t it?

    • It may lead to internal revolts/rebellions. But then blood and bone are good for soil, right?

      • Well, ultimately, less humans means less CO2 released and less pressure on other species. Also means lower global fossil fuel requirements. So whichever way you slice it, a trade war does seem to end up being good for the environment.

        The biggest issue that I understand exists with trade wars is that they generally do turn into actual wars.

      • ErmingtonPlumbingMEMBER

        Mmm,….I don’t know how good all that Radiation would be for the Environment.

      • MM Absolutely!
        I small change of practice will bring the Funeral industry into line with green thinking – and, bonus, no more trees required for coffins.
        There is of course a small problem, as EP points out, how to deal with a series of large mushroom clouds. The incandescent CO2 boosted radiation cloud will take a bit of absorbing. And then, of course, if the Russians get involved, there’s likely to be a fair amount of Polonium 210 and the odd sack of Novichok floating around.
        But then, you never get anything for nothing..

      • I did say as long as it does not lead to an actual war. If it does, the environmental recovery will obviously take longer:

        http://www.bbc.com/earth/story/20160421-the-chernobyl-exclusion-zone-is-arguably-a-nature-reserve

        The best solution to the Russian threat would be encouraging Putin and Trump to bang protectionist man boobs together and form an alliance. The EU and China would suffer finically, of course, but they wouldn’t be able to do much because of all those nukes.

  3. I’d really like MBs take on this. I think there’s a much bigger game being played here.

    There are no good options here for China.

    * If they dump treasuries, the USD falls and US goods become cheaper on a global basis. So even if they’re not buying, someone else will and it’s possible there’ll be a boom in the US while China prices itself out of the contest.

    * If they drop the RMB as they have been doing, they run into the problem that a lot of their contracts globally are denominated in USD. Defaults cascade through their import sector. Impossible to make cheap things without inputs.

    * If they try to match Trump on tariffs, they have to put them 5x higher for the same pressure. People keep saying they’re being surgical about it, but the reality is, they just don’t import all that much and they’ve nearly tariffed everything as it is.

    * If they go to war, they’re about 10-15 years off being equals with the US. The US is still militarily very strong.

    * If they increase trade with other nations, they’re going to compress margins (sell cheaper) by default since finding 300million customers basically dictates the EU which is already importing shitloads from them (and who Trump’s team is trying to twist their arms into aligning with the US most likely on cultural grounds) or poor countries. Can’t sell expensive shit to poor countries. They just don’t have it.

    Arguably, from a geo-strategic point of view, now could well be the last opportunity for the US to throw its weight around and actually have a good shot at succeeding against China.

    That, and the fact there are US elections in 28 months is the most likely reason the US is hitting so hard and fast. It’s possibly do or die for US hegemony.

    The next 28 months are likely to either permanently end US dominance or lead to some sort of revolution in China.

    Those are possibly the stakes here. The US simply cannot live in a world with a dictatorial state as an equal. It can live in a world where the ideologically similar EU members are equals. Hence the pressure being put on the EU right now militarily (buy our planes/tanks and train your armies) and financially (drop the tariffs and align with democracy over dictatorship).

    I don’t think this is all Trump. Obviously he’s the pointy end of the attack, but I think there’s a lot more going on behind the scenes (and arguably why his position has been protected so far). They also get complete plausible deniability if it fails. “Trump was just a madman whom we dispensed with”.

    • Very nicely put. I will give you my take because I have been writing this very piece for tomorrow.

      It’s not clear to me that Trump has planned a great confrontation. He looks more domestically focused in his goals. That said, there are China hawks around him that would like nothing more.

      This is why I think China is making a major blunder in pushing Trump hard. As a Jacksonian POTUS he is more interested in less engagement but if you mistake that for easily manipulated into withdrawal then you’re fucked.

      If cornered, Jacksonians come out swinging with everything they’ve got.

      If it really tried, the US could trigger a debt crisis in China and push it back ten years or permanently into an earlier Japanese stagnation.

      In short, I don’t think that the White House is planning the conflict you describe but it might just stumble into it if China miscalculates. Crashing the yuan is a very bad idea in these terms.

      • Thanks 🙂

        > If it really tried, the US could trigger a debt crisis in China and push it back ten years or permanently into an earlier Japanese stagnation.

        I think Australia could be one of the bigger cards in the deck than we would feel comfortable with.
        Imagine a scenario where our spineless leaders face making the choice they’ve been trying to ignore for years.

        Imagine Trump puts ANZUS on the table if we don’t cancel our contracts with China and send our goods to the US/EU.

        Our politicians would be terrified. They might be bought and paid for by China, but if pushed, they’ll choose western democracy every time.

      • Trumpy is most definitely NOT seeking a confrontation with his ‘friend’ Xi Jinping.
        Trumpy want’s the US to ‘get along’ with China and Russia…
        from Trumpy –
        “It would look like we will probably be meeting in the not too distant future and I’ve said it from day one getting along with Russia and China and with everybody is a very good thing,” the president said in the Oval Office.
        https://www.theguardian.com/us-news/2018/jun/27/john-bolton-vladimir-putin-moscow-visit-us-russia

    • Arguably, from a geo-strategic point of view, now could well be the last opportunity for the US to throw its weight around and actually have a good shot at succeeding against China.

      Exactly – the US is an Empire in decline, it has no choice but to act now. In a decade or 2, it will be all over, bar the Mexican immigrants and the drug use.

      I’ve never really liked US hegemony via the petro dollar – but understand that it won’t go down without a fight, like any Empire before it.

    • Ronin8317MEMBER

      A crash of the Chinese economy now is not a bad thing for China in the long term, especially if all of it can be blamed on Trump. The Chinese debt bubble will blow up sooner or later, it is not sustainable.

      • I very much agree with this. All that USD denominated debt… aren’t those bags issued by foreign IBs and borne by their sucker clients? When you look at the big bailouts in Europe, like Santander and Deutsche, it was precisely this scenario. Lose billions overseas, act offended, get government cheese. In the case of Greece they could force a yoke upon the population but what exactly are they going to do to China that Xi isn’t already doing or willing to do?

    • I think you could be right and i definitely think there is a lot going on behind the scenes in US. I don’t believe US presidents just get elected, they are planted there by bigger forces. Additionally I think this is connected to the end of the major interest rate cycle spanning decades. Where too from here after the next gfc? In the past we had world wars, with nukes what this time? We have no manufacturing, somehow our govts will have to bring it back for national security purposes. This could be Trumps aim. Central banks/govts have propped up the economies in the mean time and will purposely pull the rug out when it suits their agenda. Has nothing to do with employment and inflation etc thats all bull

    • “The US simply cannot live in a world with a dictatorial state as an equal”

      It did with the USSR for decades.

      • That’s…
        Certainly one way to look at the cold war.
        A constant state of tension bordering on hot war for decades isn’t really my idea of “living with” something.

  4. The PBOC is not intervening = they are comfortable or making this happen…
    if this was a real threat PBOC would not be on the sidelines.
    A stealth devaluation in response to trade war threats?

  5. For those who think the US days are numbered, Who will replace them in the next 50 years? Certainly not China
    The Chinese are pure realpolitik. They only understand brute force. Once they get pushed up against the trade wall, they will re-evaluate and then move to a Deng Xiao Ping like posture and “bide their time”.

    Unfortunately, the world has already seen their “real face” and it isn’t pretty. This South China Sea stuff is going to come to a head and the current Chinese stance is not sustainable. What I can’t understand is if Taiwan can get American sub technology, why can’t Australia get it now or just buy the subs from the US? It’s all we really need for the next 30 years. Also, we need a huge US military base in Darwin with 20,000 to 30,000 military personnel.

  6. So are they devaluing their currency on purpose to get back at Trump tariffs or is it capital outflows and US reserves depletion? I guess what I am asking is China genuinely crashing due to US rate rises or is this all manufactured, controlled and on purpose?

  7. The RBA can stay on hold for now, but will start cutting once the G7 start cutting and start new QE program next month

  8. China’s “ample” FX reserves is a myth. M2 is US$ 27.2 trillion dollars. A 1% move in bank assets from CNY to foreign currencies is nearly US$ 300bn – which would slam the Boap into massive deficit and would force PBoC to have to cut the RRR by 125bp just to keep interbank liquidity stable.

    The People Bank is playing with fire.