Thursday, May 19, 2016

China Sends Hawkish Fed A Message - Devalues Yuan Near 2016 Lows

Just as we warned was probable, The PBOC sent a message loud and clear to the newly hawkish Fed following today's surge in the dollar after the minutes were released. With the 2nd biggest daily devaluation since the August collapse, China pushed the Yuan fix against the USD down to its lowest since early February - barely above the January lows. As we warned earlier, the China-Panic trade looms loud now as turmoil appears all that is left to stop The Fed unleashing another round of liquidity-suckiong rate hikes sooner than the market wants.
All eyes have been firmly focus on the Yuan's move against the USD but in fact the Yuan has been falling non-stop against the world's major currencies...
The critical issue now is that the U.S. dollar is appreciating again. The
Bloomberg Dollar index is up 2.8% in the last two weeks and another 2%
wouldn’t be an unreasonable consolidation in the context of it dropping
more than 7% in the previous three months.

That previous dollar slide distracted from the fact that yuan depreciation never abated. Against the basket, it’s been weakening at an average rate of almost 1.2% per month for the last five months.

The market’s single-minded focus on USD/CNY is crucial and it’s also why disaster can still be averted. It will require the PBOC to temporarily suspend their yuan-weakening policy for as long as the dollar is climbing.

Otherwise, prepare to batten down the hatches for the coming storm.
It appears that it is the USD's turn to face The PBOC once again... The 2nd biggest daily devaluation of the Yuan fix against the USD since August's collapse.

Simply put, China does not want The Fed sucking the liquidity lifeline out of world markets right as it embarks on another round of desperate credit reflation.
Given The Fed's comments today, the only excuse left for Yellen and her friends (unless they are willing to lose all credibility due to short-term fluctuations in macro-economic data from now to June meeting - as opposed to their mandated long-term view) is if markets turmoil enough to warrant some level of conservatism. As we have warned before - bullish stock market investors should be careful what they wish for - the higher stocks go, the higher the chances of rate hike, and the more likely China pre-taliates with some turmoil-inducing events to stall the unwind... the last time traders panicced about China, bad things happened to stocks...