Twitter Is All Aflutter About A Potential Chinese Yuan Devaluation

Originally published by AxiTrader

Forex traders on Twitter were all aflutter earlier this morning after a broker had the Yuan rate against the US dollar marked near 7.5 against prevailing prices in the market of 6.86 and 6.87 for the CNH and CNY spot prices on Reuters.

Coming on the day that China is expected to release the details of movements in its foreign exchange reserves, and coming after some fairly interesting moves by authorities to clamp down on outward capital flows, the nervousness among traders is understandable.

That's doubly the case because if I think about what could be about the most destabilising conventional thing - that is, non-black-swan - which could rattle markets right now it would be the 10% devaluation in the Yuan forex traders were fretting about.

I say that for two reasons.

First it would suggest the trouble of capital flight in China is much bigger than we all thought. It would also suggest that the PBOC and SAFE are losing the battle. There would naturally then also be a level of self-perpetuation to the fall as devaluation, begets flight, begets devaluation.

The second issue would be the geo-political angle.

President-elect trump singled China and its currency policy out for special mention in two tweets yesterday after they objected to his phone call with the Taiwanese president.

So if China was to devalue it would be a severe poke in the eye to Trump. It would be the diplomatic equivalent of president Xi saying to president-elect Trump, "bring it on fella". The "it" being the Sino-US trade war folks are fearing Trump might pursue.

But, such a move would be pre-emptive in the extreme. Just this morning the South China Morning Post quotes Chinese analysts who say that Trump's tweets show a lack of diplomatic skills. Would China really make the same error.

Of course they might. There is but one certainty in life now we know president-elect trump doesn't pay taxes.

But such a move by Chinese officials to devalue would be entirely inconsistent with their aims, and the global communities understanding, when the IMF included the Chinese yuan in its SDR basket earlier this year. Indeed I'd argue the PBOC's efforts, and SAFE's new authority over transactions down to $5 million to stem capital flows and the Yuan's rate of weakening, show Beijing is still trying to be a good globalo forex citizen.

That is something Donald Trump's tweets yesterday doesn't acknowledge. Yes the Yuan has weakened over the past 15 or 16 months. But so too have many currencies against the US dollar.

So my bottom line is I don't expect the yuan to be devalued today by the PBOC.

But if it is all heck will break loose in global markets as investors and traders move cash to the sidelines and out of harms way.

So far it seems the rest of AsiaFX isn't perturbed either. rates have opened up reflecting the US dollar's reversal we saw in the G10 last night.

Here's the region's currency levels at 8.45am Beijing/Singapore time.

And, My Asian Market Chart of the Day - A long-term look at USDCNY and the US dollar index.

This chart speaks for itself. For most of the last few years the Chinese Yuan has been stronger than the US dollars moves against the Euro, and other currencies would suggest. recently it has caught up. But it has not weakened materially outside of what the US dollar's strength would imply.

A devaluation today of the 10% folks were worried out would be out of character with this relationship and signal a big departure for Beijing. A a big shift in global markets.

Have a great day's trading