China has chewed through close to half a trillion dollars of its foreign currency reserves (excluding gold) over the last year, supporting the Yuan.
But the Yuan continues to sink against the US Dollar.
When people don’t have a say in how the country is run, their capital tends to vote with its feet.
The Federal Reserve, Bank of England, European Central Bank and Bank of Japan all expanded their balance sheets (commonly referred to as quantitative easing or QE for short) post-2008 to counteract a contracting money supply and prevent a deflationary spiral. These actions also have the beneficial effect of weakening the currency and improving international competitiveness.
China was considered immune because of its persistent current account surplus and $4 Trillion in foreign reserves. But the recent sharp contraction in Chinese exports to the EU suggest otherwise.
The People’s Bank of China (PBOC) responded by effectively devaluing the Yuan. So far the “one-off adjustment” has been repeated on three consecutive days.
The Euro appreciated considerably against the US dollar as CNY carry trades are unwound.
Gold broke out of its narrow rectangle between $1080 and $1100 per ounce as investors scuttled to the safety of bullion.
* Target calculation: 1100 – ( 1200 – 1100 ) = 1000
The Yen displays little net gain or loss.
The Dollar Index does not include China’s Yuan and is falling primarily because of the Euro. The Broad Trade-Weighted Index which includes the Yuan is calculated weekly; so it will take a few days before we can assess the impact.
Competing devaluations are likely to continue as each state (or trading block) attempts to maintain an export surplus. This is a zero sum game, so each action will inevitably elicit an equivalent response from major trading partners. Currency markets are awash with vast sums of liquid capital and an estimated $9 Trillion in carry trades (where hedge funds borrow in a low-interest-rate currency and invest in another at higher rates). Any beggar-thy-neighbor escalation is likely to destabilize financial markets and the precarious balance may prove difficult to restore.
During the 1997 Asian Financial Crisis George Soros called for international regulation of financial markets to prevent a reoccurrence.
It is time to recognize that financial markets are inherently unstable. Imposing market discipline means imposing instability, and how much instability can society take? …. To put it bluntly, the choice confronting us is whether we will regulate global financial markets internationally or leave it to each individual state to protect its interests as best it can. The latter course will surely lead to the breakdown of the gigantic circulatory system, which goes under the name of global capitalism.
~ George Soros: The Crisis of Global Capitalism (1998)
by Zarathustra
After a long period since late last year as Chinese Yuan was expected to depreciate, it appears that the expectation of Chinese Yuan appreciation is back on people’s mind. Chinese Yuan hits the highest level since the revaluation started in 2005, completely reversing the depreciation since earlier this year…..
via Chinese Yuan hits highest level against USD, but PBOC wants it weaker.
