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:
- India: The World’s Fastest Growing Large Economy?
Popular Narrative India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to. India's quarterly annualized GDP growth rate since 2008, according to MOSPI (statistics ministry) - click to enlarge. The IMF, the World Bank, and the international media have celebrated...
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- Don’t Blame Trump When the World Ends
Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook. One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
- What is the Best Time to Buy Stocks?
Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity? Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- Making America Great Again – How to Judge Policy
A Simple Formula MIAMI – How do we know if new programs will make the economy better... or worse? Here’s a simple formula: W = rv (w-w – w-l) That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it... except the essential heartwood. When devising a win-win,...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...
- Silver Futures Market Assistance – Precious Metals Supply and Demand
Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday. Taking off for real or not? Photo credit: NASA Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...