Yuan Declines Several Days in a Row
We want to point readers to our previous article on the rout in various EM currencies, in which we opined that the dramatic weakening of the Japanese yen was likely an important trigger of these moves. We felt reminded of the Asian crisis in this context, which could ultimately be traced back to a succession of events, beginning with a massive unilateral yuan devaluation in 1994, which was soon followed by the yen weakening sharply from its 1995 blow-off top. The 'Asian Tigers' meanwhile had maintained currency pegs to the dollar, which led to large current account deficits and the build-up of credit and asset bubbles. Many companies in these countries borrowed in dollars, believing the pegs had removed currency risk. The outcome was not pretty.
In theory, there exists much greater flexibility nowadays – there are no longer any pegs, with the notable exception of the currency board arrangement of the Hong Kong Dollar, and many of the former crisis countries have used the time since the Asian crisis to build up large war chests in the form of sizable foreign exchange reserves. However, sudden capital outflows and sharply weakening exchange rates are still bound to have numerous knock-on effects.
Anyway, we were wondering for how much longer China would allow the yuan to appreciate in this environment and are therefore keeping a close eye on the currency. It may well be that the trend is about to change. In recent days, the yuan has weakened markedly, although the move is still small in a bigger picture context. Still, it is the biggest monthly downward correction in some time. If the yuan were to weaken further, we would have to conclude that China's leadership has decided that it is no longer advantageous to let the currency appreciate.
The yuan has been a one way street for so long now that we imagine all sorts of trading strategies have been implemented around this seeming one way bet. In other words, a significant weakening of the yuan may have numerous unexpected effects due to the interconnectedness of financial markets.
Below are a daily and a monthly chart of the yuan showing the recent moves. As can be seen, the daily values have been quite volatile for some time and the recent move has merely ended at the lower end of the trading range of the past two months. In terms of its extent, the move is therefore not overly noteworthy yet. It may still turn out to be just another blip. However, on the daily chart the recent move has acquired more of a 'trending character' than was exhibited by the short term volatility that preceded it:
The yuan, daily – after a great deal of volatility in January and February, a trend is seemingly crystallizing now – click to enlarge.
On the monthly chart, we can see that the recent correction is actually the biggest reversal in quite some time – the last time a similar move was seen on a monthly basis was in early 2012. Of course, that move turned out to be a mere pause – the yuan resumed its rally shortly thereafter. This time we have some doubts that the same thing will happen again. Political pressure on China with respect to the alleged undervaluation of the yuan has eased markedly, and in view of the much weaker Japanese yen and the rout in many EM currencies, there seems to be no good reason to let the appreciation of the yuan continue.
Shanghai Stock Market – Bound to Make a Move Soon?
Meanwhile, China's stock market just doesn't seem able to get out of its rut…the larger downtrend remains intact so far, however, the decline has lost a lot of momentum over the past two years and the index has not made new lows since the spike down that occurred in the middle of last year. There may soon be an opportunity to play it for a trade, provided it continues to hold above last year's lows. A break of said lows would of course be bearish, but we currently don't expect that to happen. However, we think one should definitely wait and see if the lows will actually hold before making a commitment:
The Shanghai stock market is still going nowhere. If it manages to maintain a sideways trend for much longer, then it may be time to think about playing it for a trade. Whenever a market becomes extremely dull, it is usually a good idea to watch it closely – just remember Japan's stock market in 2011-2012 – click to enlarge.
One definitely should keep an eye on the yuan's trend. If the yuan actually begins to weaken more significantly, wider repercussions are likely to ensue. The downtrend in the yen seems to have added quite a bit of momentum to the weakening of exchange rates in many emerging markets, and it seems likely that a weaker yuan would add to the pressure.
China's stock market meanwhile has entered a phase of 'dullness' – at some point a playable rally will likely emerge out of the recent sideways movement. In the event that last year's lows are broken, another leg down in the bear market is going to be underway, which can of course not yet be ruled out in view of the larger trend. However, we think the probability that the market will eventually rally is somewhat higher (even a combination, i.e., first a sizable rally, then a move to new lows is of course possible). Usually markets that have been dull for quite some time soon cease to be dull.
Charts by: Investing.com, StockCharts
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “The Yuan Weakens – Is it Just Another Blip?”
Most read in the last 20 days:
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...