The Name's Yuan - Chinese Yuan

|
Includes: CHN, CN, CNY, CXSE, CYB, FCA, FLCH, FXCH, FXI, FXP, GXC, KGRN, MCHI, PGJ, TDF, UDN, USDU, UUP, WCHN, XPP, YANG, YAO, YINN, YXI
by: Mark St. Cyr

There's a double 0 along with a seven that makes the title even more Bond-esque, however, it also contains a period. That "period" is the distinction point, if you will, that makes the allusion or play on words go from having fun to serious meaning and implications. For we are all now involved in an international game of intrigue and intent, with consequences for global upheaval profound enough to cause a Mr. Goldfinger type character to get giddy calculating possible windfalls.

That, of course, is made when one now brings up China's Yuan with its now explicitly stated demarcation level expressed openly via the PBOC's vice governor last week. For it has now been made clear that the cross rate of the USD/CNY will be adamantly defended from breaking through the now clearly bull's-eyed 7.00 level.

Here's the question that's never asked by the so-called "smart crowd": Why? But even more particularly: Why now? I mean, if devaluation is just the tonic that fixes all the unease brought forth via tariff symptoms as has been expressed via the PhD cabal of convoluted delusional theorizing. Again, why and why now?

After all, if China has been the masterful invisible hand behind its currency over the last few years that the Ivy Leagued crowd of PhD analysts, think-tanks, et al. that has told and sold this premise across mainstream business/financial media (aka "Bubble Vision") over this period, the question begs itself to be asked.

Yet, they either won't, don't or can't, because they have no clue themselves. So I will.

Again: Why, and why now? Hint: Begins with Federal Reserve and ends with Trump.

Here's my reasoning:

I have been making the case since 2014 that the moment the Fed began shutting down its malfeasance policy known as QE (quantitative easing) that the first tremors that should be taken as warning signs that there was a far, more greater seismic shift on the horizon would be seen throughout both the emerging markets as well as the affiliated currencies.

In August 2015 that "shift" appeared in spades emanating from the largest emerging market known: China.

That rout is now known as "China's Black Monday." However, it was also a historic date made around the globe where it sent the U.S. futures market into a free fall causing the first limit down circuit breakers to be tripped across its largest indexes concurrently. Again, a historic first.

But that's now looked back upon as not only ancient history. Recent history is more to the effect of "Don't worry, the Fed will always save us!" Yet, that's now an open debate for whatever reasoning one wants to use. For the Fed has now made it clear that there is no real way to interpret its actions.

Think this is a convoluted argument? Fair point, so think of it this way using the following:

Steely resolve to "stay the course" (i.e., keep raising rates and allow accelerated balance sheet roll-off) could very well be interpreted by many as signaling something very different. It could just as well signal, as many have suggested, "The Fed has no clue" in what it's doing other than following its fool's errand of self imposed mandates. Or, that the Fed is actually "out-of-bullets" as the saying goes and can't do anything except appear as if they're "loading up" again. Or, __________ (fill in your own here). Each one could (and probably will) exacerbate any gyrations causing even more turmoil. But that's for another article; now back to the Yuan.

Here's an excerpt from one of my prior articles this past summer "Is The Yuan Weakening From Intent Or Loss Of Control". To wit:

It would seem that the mainstream business/financial media is suddenly catching on to the implications of a sudden Chinese Yuan devaluation, and its ability to roil global markets. Tariff retaliation is now the dominant cause-and-effect extrapolation given.

However, is this a form of some silent intent and practice that many are trying to explain? Or, is this something far more meaningful that everyone seems to be missing? And by "meaningful" I mean:

Are the current gyrations intentional? I.e., The current movements are a result of intended strategy and tactically delivered.

Or: Are they the result of a situation becoming untenable where situational tactics and/or responses are being made and/or deployed in desperation?

Both have the same initial effect, but both have very different endings. I.e., one may be controllable (and that is debatable). The other makes "A bull in a china shop" scenario appear as wishful thinking.

I am of the opinion, and have been for some time, that the current gyrations in the USD/CNY cross rate has not come via some masterful game of Go. On the contrary.

What I believe has been happening is that if there is any sort of "game" going on, it is based more in the politburo's realization that they have lost control of their currency and are now trying frantically front-run editorially what is happening via its house organs and more.

The reasoning is simple: If retaliation for tariffs was to use the currency as a weapon - then why intervene at all?

That "question" I've been posing consistently seems to be demanding far more concrete answers than many ever contemplated. However, as I've also stated prior, the answer seems to be exactly what I was portending may be closer to the true cause for panic and not what the mainstream "Bubble Vision" experts were arguing.

Again, from the aforementioned article. To wit:

And there lies the 64-Trillion Yuan question: Why?

Here's what I believe:

The further interjection of politburo monetary manipulation, in all its forms (e.g., reserve rate cuts, credit extensions, buying its currency, etc., etc., etc.) in such open and easily witnessed fashions, all the while, by being nearly silent (meaning vocally) to its currency weakening, along with doing so at levels well below its openly declared demarcation level of 6.70, requires one to think a bit deeper.

For if a currency devaluation (and a sever one at that) would be seen as a logical counter move in retaliation against any tariffs. Then why intercede so soon? Would not above 7.00 be a fair level to start? Especially if it would probably cripple your adversary in the short run? (i.e., cause some form of market rout.)

Unless the "game" is really nothing about tariffs, and such. But has everything to do with the long game that's truly China's goal: Making the Yuan the reserve currency displacing the Dollar.

In other words: It's all about the IMF's SDR (special drawing rights.) All the rest is just noise.

Big noise, yes. But that's where the real long game is being played out when it comes to China's true intentions for the future. My conjecture, of course. Yet, it appears to be far more explanatory than what I hear proposed by most (if not all) of the so-called "smart crowd."

I have maintained that the politburo in China (especially its "Leader for Life," Xi Jinping) is not only acutely aware of the current possibilities for a major market meltdown (first wake-up call was 2015) and the unrest it will unleash, but also actually it is quite comfortable ("comfortable" is a relative term) with it happening.

I contend it believes it'll be able to not just control its populace (i.e., think iron fist), but more importantly appears like a "steady hand" for money, investments and more to run towards should the global markets roil. I.e., they will become the alternative consideration for "scared money" to run towards rather than the go-to of decades past of not just the U.S. Dollar, but Dollar-based assets.

The problem now is that what looked like a sure slam-dunk before Trump is now something more akin to a Hail Mary type strategy. I.e., it doesn't look like we're all sinking at the same time as we once appeared.

The U.S. by all outward appearances seems to have plugged its leaks and gotten its motor running and is steaming off towards more favorable waters. I.e., its own safe harbors known as "doing business in the U.S." Whether it's real or not, right now, does not matter. Currently, it's the only appearance that matters.

Everyone else seems to not only be sinking, but also the Titanic equivalent of the emerging markets', e.g. China, rudder seems to be making its way above the water for all to see and the life-saving efforts of the crew (e.g., politburo) appear to be haphazard or contradictory to what's being told. I.e., everything's fine, go back to your cabins!

Should the sudden ear-shattering noise of a snapping of the hull (aka 7.00 cross rate of the U.S.$ and Yuan) be heard across the globe via forex radars, the suction wave that will be unleashed will drag not just China but nearly everything else within its vortex. This will be the moment that the entire effort for China's dominance will fall and everything China has worked so painstakingly hard to try to bring forth will be over. Repeat: O.V.E.R.

As of this writing which is before the markets in China open for the new week, the USD/CNY is currently bouncing between 6.94 and 6.96. China has been subtlety intervening since August of this year trying to keep the rise at bay. Everyone has interpreted this "invisible hand" type manipulation as some form of well-executed and planned brinkmanship as to devalue in respect to tariffs, yet not look like they're doing it intentionally. The problem with that premise is this:

If that were the case: then why intervene at all at this level if devaluation is the salve that helps heal all tariff wounds? Unless…

Above 7.00 proves that "the snap that will be heard round the world" has indeed happened regardless of any stated politburo intervention. Or said differently: China has indeed lost control of its markets, currency and more. And that dear reader changes everything in the eyes of markets everywhere. Repeat: everywhere.

For if the politburo which has now openly come out and stated that not only does it think it's an important level, but also is going to vehemently defend it. Should it fail? Let me put this as succinctly as I can:

It will be the final sound marking for history that the once and all but assured assumption of China's 2025 vision isn't just sinking - but sunk.