China desperately wants the yuan to rise to stem capital flight. Curiously, this puts China on the same wavelength as Trump, at lease as far as currencies go.
However, currency intervention does little in the short run, and nothing in the long run. Let’s take a look at some charts.
Intervention Fails Daily Look
Intervention Fails Monthly Look
What’s Going On with the Chinese Renminbi?
Via email, Albert Edwards’s Global Strategy Weekly addresses the question “What’s going on with the Chinese renminbi?”
It was somewhat perplexing that the increasing rout in the renminbi in Q4 last year barely raised a murmur of market concern. Many saw it as just the mirror image of the stronger dollar in the aftermath the Trump victory, but actually the renminbi was also being driven lower by an accelerating capital flight.
Global markets really couldn’t seem to give a toss about events in China. Yet they should. And the Chinese authorities’ huge intervention to stamp on the hands of currency speculators is a signal that should be heeded. All is not well in the middle kingdom.
BitCoin vs. Renminbi
Yesterday’s unprecedented official intervention in the overnight deposit market was intended to trigger a savage rally in he offshore renminbi as speculators rushed to cover their shorts.
Overnight Yuan Rate
This renminbi rally is likely nothing more than a short-term interruption in its decline against the dollar. Clearly with Trump’s anti-trade/China rhetoric it is most prudent to control the pace of devaluation. Indeed, amid the Christmas festivities, the Chinese authorities took out an insurance policy by adding 13 new currencies to their target trade-weighted (CFETS) basket.
China’s Currency Basket Weight
Edwards notes “In the event of another EM currency rout, like that seen in 2015, the Chinese renminbi will now be joining in!”
True enough, but …
- An emerging market currency rout has already taken place.
- The basket footnote reads “Effective dollar weight only reduced by 2.4% when factoring in pegged currencies (HKD, AED, SAR).” Thus the change looks more important than it really is.
- The US dollar is more likely to decline than rise at this point if the Trump rally fizzles, the US economy falters, or the Fed does not hike the expected three times in 2017.
All three points apply. Yet, that may not help China. It is the Yuan/USD ratio that matters most. And the yuan may not follow the US dollar index, especially if China’s GDP weakens more than expected.
Currency interventions don’t work. More specifically, interventions can strengthen existing trends, but they waste reserves fighting trends.
— Mike “Mish” Shedlock (@MishGEA) January 6, 2017
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Mike “Mish” Shedlock
