When it comes to China all the main stream media will ever cover is something in regards to a “hot topic of the day” brought about by either a political discourse, or some celebratory exhibition being observed within its boundaries. When it comes to trade, or business topics, they’ve pretty much abandoned them in total, leaving that realm for the “business/financial” outlets.
So it’s no wonder that when it comes to trade, or monetary issues most haven’t a clue. However, one would think when it came to the #1 financial headline generator that had the ability to send markets plunging reminiscent of a “Black Monday” causing global financial panic worldwide, and triggering (the first time in history) a tripping of all three circuit breakers on the U.S.’s major futures markets, while simultaneously causing the Federal Reserve for the first time in its history to openly state “international developments” as a root cause and catalyst to postpone a monetary decision that is supposedly U.S. centric only. The business/financial media would be all over it. Yet? (insert crickets here)
What is that #1 generator you might ask? Hint: The Yuan.
Except for places like Zero Hedge™ and a few others. When it comes to anything about China’s latest currency devaluation (whether by design or not) one would think there was a media blackout on the subject. I find that strange only for this reason: If you remember the day you woke up in August of last year thinking “Here we go again!” Where some markets had plunged over 1000 points bringing back all the fears of 2007/08. The root cause of that was: the Yuan, and its sudden devaluation.
Only after what seemed (and jawboned) like stabilization (and a note to Jim Cramer from Tim Cook on China implying “nothing to see here, move along” added in for extra measure) did the markets bounce back off the lows to then resume their monetary policy captured antics.
So with that all said for context, the question must be asked: Were you aware that the Yuan tumbled to lows not seen in 6 years? Remember – in August of 2015 the Yuan went to a level that sent markets roiling globally. We’re now well under (or above depending how you measure) that level, and falling further.
Do you think with what you now know that that should be a front-page headline across at least one major financial/business main stream media publication? I know I do.
Or, is that now sooooo 2015? I’m sorry, but this is not something trivial. And if you’re in business, or of the entrepreneurial mindset – not paying attention to this matter is not an option. This is where out-of-the-blue type scenarios with tremendous repercussions such as what happened in August of last year originate, then germinate. If you want proof – just think back to that August so many would like to forget.
Now some will think “Maybe there’s no concern because the politburo has it under control?” It’s a fair response, but there’s a problem inherent with the answer, or answers.
First: If the Chinese are doing it in a “controlled” type manner, it reeks of “currency manipulation” tactics for others (think U.S. presidential politics as of today) to latch onto and build support, as well as strengthen a case for retaliation. i.e., placing tariffs, etc, etc.
If you think about it from the Chinese perspective: that would mean you were openly, and intentionally goading as to fuel some version of a trade, or currency war. When you come at it using that thought process; it just doesn’t make sense. Both from a tactical standpoint, as well as political. Hence lies what maybe even a more troubling scenario. e.g., They’ve lost control.
The only other reason more troubling than the first – is the second. For it is here where things become quite precarious, as I’ve stated many times: “The currency markets are where you must keep your eyes and ears affixed. It’s where the real games are played and won.” And losing control of one’s currency has implications for all others, both warranted, as well as unintended. And it seems this latter scenario might be more on point than the former.
In just a little more than a month ago HIBOR (Honk Kong’s overnight CNH funding rates) exploded to their highest levels since the beginning of the year. The reasoning behind this speculated by many was in direct relation to the oncoming of holidays where liquidity can become scarce. It’s a valid point. However, there was another reason just as compelling with far more onerous tones which many failed to connect the dots to. Here’s how Zero Hedge explained it. To wit:
“However, the most likely explanation is that in order to force Yuan shorts to capitulate as 6.70 remains just barely within reach, the PBOC is simply continuing to squeeze the yuan shorts and raising the cost of shorting yuan, as explained last week. Ultimately, the PBoC weakened its yuan fix by 169 pips to 6.6895 versus yesterday’s 6.6726, even as many were expecting the USDCNY to finally breach the 6.70 resistance level, the defense of which may have explained today’s aggressive spike in HIBOR tightening.”
Less than a week later the above was proved out correct when the afore-mentioned HIBOR surge took place. And once again, this is where that “second” answer I alluded to possibly being more of the issue that the “first” brings with it the real concern.
It would appear that China has been actively pursuing a currency strategy to keep sellers (i.e., shorts) at bay by any means available – no matter how dramatic. They have introduced measures which have exploded HIBOR nearly 200% in overnight trading scare tactics as to either punish, or decimate any bearish bets against anyone currently holding, and better yet, even thinking about placing on the Yuan.
The “magical” level implied by the politburo, which they seemed to be telegraphing in no uncertain terms, was at or about 6.70 (USD/CNH.) They’ve held this level, or manipulated aggressive tactical repercussions to ensure a stability at this level since that fateful exhibition in last August when it was evident control was slipping at best, lost at worst.
Since then they’ve shown blatant disregard as to hide their involvement if it meant holding that level through their inclusion into the SDR (Special Drawing Rights basket of currencies,) as well as ahead, during, and following a G-20 meeting. Holding that 6.70 line-in-the-sand has been assumed to be paramount. Until now….
As of this writing the current level is 6.775 and rising. At first glance that number might not look like much. But in currency markets, (especially where leverage is used in multiples that can bankrupt nations let alone “traders” in one fell swoop) it’s very concerning. For it’s far above what China has demonstrated as “acceptable” and could cause retaliatory measures (again out-of-the-blue) by the politburo that have rippling effects throughout the entire currency spectrum.
Which brings us back to those two troubling questions and answers: Are we on, or about, to see a massive currency move by China as to defend its currency against the shorts? Or, has China lost control and we are on the verge of a massive devaluation with impending monetary and trade ramifications to be felt throughout the global markets?
There is a “third” option, but I’m sorry to say – it’s worse that either the above. And that is, much like I’ve stated previous about “weaponizing the Fed” could cause intended distresses via the monetary channel.
China may have decided to strike first, not by intervening, rather, by something more innocuous, but just as devastating: By standing on the sidelines.
I’m afraid we shall find out – much soon than later.
© 2016 Mark St.Cyr