RMB And HKD: Chinese New Year Attacks

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Includes: CNY, CYB, EWH, FCHI, FHK, FXCH
by: Enzio von Pfeil

This Monday to Wednesday, 8th-10th February, expect the RMB and HKD to be attacked.

  1. Chinese New Year

    Being a lunar festival, it occurs this 8th-10th February. Thus, China and Hong Kong will be shut for business. But not their offshore markets, by which we primarily mean London, of course. This, along with New York, Singapore and Japan, is where the hedge fund sharks, e.g. George Soros' one, will be circling snapping at the RMB and the HKD.
  2. RMB Backgrounder

    Either Beijing's Central Bank will pull off yet another devaluation like the tiny one this 11th August. ("Beijing's Central Bank" implies that the Peoples' Bank of China (PBoC) reports to the almighty State Council, meaning that it does NOT have the same independence as the Fed or the ECB.) Or the markets will force downward pressure, all the more so because of increasing capital outflows (total in 2015: about US$ 1 trillion), Japan's move this Monday to impose negative interest rates on banks' fresh excess reserves held at the Bank of Japan, the BoJ. This Sunday, we will be told how China's forex reserves were depleted in January: probably by another $118 billion, according to a Bloomberg poll of economists. At this rate, Beijing cannot keep fighting markets; otherwise, her Economic Time® will worsen even more, meaning that her already excess demand for money will intensify. That excess demand means that her stock market cannot perform, because there isn't the cash to fuel it. And given that 85% of the stock market is driven by retail investors, expect social unrest to be fanned commensurately to further drops in the market. None of which will please the Party, which wants to maintain power.
  3. RMB-Guess

    So, our guess is a "twofer": this week, expect the PBoC yet again to launch a pygmy devaluation. It has said as much recently (South China Morning Post, 6th February, 2019, p B3, column two.) The markets will deem this to be insufficient, meaning they will drive the RMB down even more. My guess: by a further 10-15%, after which the capital outflows and thus exchange rate will stabilise.
  4. HKD Backgrounder

    I just don't "get" why, when the RMB tumbles, our peg must be broken - after all, we are linked to the US dollar, not to the RMB! Why are the peg and the RMB lumped? Plenty of noise, however, about our hallowed peg to the dollar being broken over the looming Chinese New Year. So, what will happen?
  5. HKD-Guess

    The sharks' attack won't be successful because of the mechanistic way in which the peg operates; instead, those long the HKD will make plenty of money thanks to soaring overnight interbank rates.
  6. Punting Implication

    Short the RMB and go long the HKD.