From Societe Generale’s analysts over the weekend, with our emphasis, on the fallout from the weakening yuan on the European Central Bank, and why that might circle back (and back again):
Global currency markets have taken their cue from China and commodities, and the resulting shifts are causing something of a headache for the major central banks. Since the low of last spring, the euro has bounced back by just over 9% trade-weighted. Similar moves have been observed for the JPY and USD, with the bulk of depreciation coming from EM commodity currencies. Their status as funding currencies has even seen the euro and yen gain against the dollar in recent weeks
Yup, amidst all the CNY/CNH spread stuff, this is what really counts.
From UBS, with our emphasis:
And here’s the thing – the factors that we believe have motivated the shift in currency regime [to a broader trade-weighted basket] are unlikely to change anytime soon. Weak international demand will likely keep a lid on export growth. Most importantly, lest we miss the woods for the trees, let’s remind ourselves that China’s key issue is that it is levering up almost at the same pace as it was 5 years back, when investors first started worrying about credit misallocation (Figure 8). The more levered the economy, the less effective countercyclical monetary will be. Clearly, then, all growth enhancing options need to be on the table. From a 2-3 year perspective, we do believe that the CNY can be considerably weaker than what forwards are implying.
With an unspoken currency war supposedly upon us and a cry for China to join in — according to BofAML the market is pricing about a 30 per cent probability of a 10 per cent devaluation of the CNY this year while insistent market forces push the yuan down anyway — we thought a lopsided CNY depreciation pro and con list from Nomura might be helpful:
1. Makes exports more competitive, helping to boost growth.
2. Raises the cost of imports, helping to reduce the risk of CPI deflation.
Another BoAML FX observation on Thursday, this by way of Claudio Piron, emerging Asia FI/FX strategist, and his team.
On the analysts’ radar this week, the continuing risk of CNY depreciation, and in particular this chart:
More on that Friday PBoC rate cut — and just as China goes ahead and cuts its 14-day repo operation rate by another 20bp to 3.20 per cent too. That move on Tuesday, according to Nomura, suggests that the PBoC will continue to ease monetary policy… which would be true to form.
As Barc note, “the policy rate cut suggests that China is once again following the typical sequence in a monetary easing cycle – the pace of CNY appreciation is often slowed in advanced, followed later by the same directional moves in the policy rate and banks’ required reserve ratio.” Read more
Nine days in and it’s still falling…
Some analysts had thought Beijing was ready to let the renminbi stabilise, but a sharp sell-off on Friday – at one point it declined 0.9 per cent, its biggest daily fall since the new currency system was introduced in 2005 – showed that the central bank was still determined to push it further.
“We’re still seeing PBoC intervention”, said a trader with a bank in Beijing. “This is beyond our expectations.”
Argue about more sweeping policy changes as you will (the bet is still basically on a PBoC attempt to deter speculative inflows) but maybe keep an eye on the 6.20 level as you do. Read more
And on the seventh day it fell again, in accordance with the PBoC… which cut the fixing rate.
Pity the RMB carry trade, no matter what the reason. Deliberate carry trade rumbling, trade band widening to allow greater market control of the exchange rate… or maybe, just maybe, that China is kinda thinking that a depreciating yuan ain’t a terrible policy right now. Read more
Something’s afoot in the world of RMB.
The renminbi fell on Tuesday by the most in a single day since 2012, dropping 0.35 per cent against the dollar in the onshore market by midday in Shanghai, and 0.7 per cent since Wednesday, as the FT reported.
The market has put this down to an imminent change in China’s foreign exchange regime. The narrative is that the PBOC is preparing to widen the trading band ahead of flotation and is spooking the market intentionally, so that it realises that the RMB goes down as well as up, and that carry-trades are no free lunch.
Not everyone is as convinced. Read more
There may be a new China to consider but its signs are not very easy to discern. The yuan is on a roll against the dollar, hitting multiple new highs since July but somewhat confusingly, estimates suggest that in the 12 months through September, some $225bn flowed out of China — that kind of outflow doesn’t square with the yuan’s recent strength. Read more
Remember the days when Chinese banks used to routinely drain dollars from Chinese corporates? The days when the Chinese corporate sector was a net dollar seller?
Those days, it seems, may have very abruptly come to a halt. Read more
All eyes are on the US Treasury bond sell-off (the longest drop since 2006 according to Bloomberg).
Given that, we thought it might make sense to throw this little development into the mixing bowl of the theories that are doing the rounds with respect to what’s driving it. Read more
Here’s an item that slipped by us at the end of last week — but not past the
worrisomely workaholic indefatigable Stacy Marie-Ishmael of FT Tilt, who spotted it while on vacation and forwarded it to us. (Thanks.)
From the emerging markets research group at BBVA: Read more
The past, present, and future of international currency dominance
Now here’s a renminbi mystery.
Not only did the People’s Bank of China fix the USDCNY cross-rate lower for the eighth time running on Monday at 6.7110, versus Friday’s 6.7172 — the longest run of low fixes since October 2007. But the cross-rate actually traded below the fix itself, hitting a low of 6.7095: Read more
Twelve out of nineteen respondents to a Bloomberg survey on the appreciation of China’s currency believe that the country’s central bank will introduce a free-float by the end of this quarter. Five predicted a September roll-out, while the remaining respondents foresee action by the year’s end at most. Analysts affirmed that China remains wary of a one-off revaluation lest it appear to succumb to foreign pressure.
FT Alphaville looks at the temporary nature (or otherwise) of the Chinese trade deficit. Read more
Oh, can’t we have renminbi revaluation before the weekend, China? Please?
Reuters reports that forwards on the RMB deflated a bit on Friday. Seems traders found a Thursday NYT piece, which declared a rise “very close” and imminent in the “coming days”, too good to be true. Read more
China’s leaders have long been known for their pragmatically mysterious sayings, FT Alphaville observes – and ‘the renminbi is basically stable’ counts as one of them. China’s 2005 revaluation shows that the phrase can mean anything China wants it to mean – useful to know, amid the current debate on the country’s currency. Read more
…To judge from the international institutions which were shoved into the fray over RMB appreciation on Wednesday, including the World Bank and UNCTAD. At least it means the debate is now getting to the broader problem — imbalances.
China bears, time to take note. Read more
Ah, Yuan revaluation worriers: name-calling won’t win the argument for you. But sage advice from a certain investment bank just might.
Monday brought the sound and fury of a letter from 130 U.S. Representatives to the Treasury demanding that it brand China as a ‘currency manipulator’. Read more