From Tyler Durden at zerohedge.com:
One of the catalysts for today’s selloff was the thoroughly unexpected announcement by the Chinese Foreign Exchange Trade System (part of the PBOC), which as we said earlier, hints at substantially more devaluation of the Chinese currency, a currency which as is well-known, is pegged to a dollar which has been soaring in the past year, and which many believe will continue to soar after the Fed hikes rates.
This is what the CFETS said:
… it is consistent with international practice that CFETS publishes its RMB exchange rate index. Since the beginning of 2015, the trend of this index has been relatively stable. The index is 102.93 on November 30th, appreciated 2.93% from the end of 2014. This shows that, even though RMB has depreciated against USD since the beginning of this year, it has appreciated modestly against a basket of currencies. Therefore, RMB is relatively a strong currency among the major international currencies.
Lots of words to say one thing, China has revealed its own trade-weighted index, and this is how we explained why first thing this morning: “the Trade-Weighted Yuan is still too strong.”
Yes, China will henceforth look at the Yuan not only relative to the USD but relative to the currencies of all its trade partners (since the USD keeps surging and on a relative basis, China’s deval to the USD means nothing at all relative to all other currencies).
Why is this a big deal? Because as frequent readers will recall, as we noted on August 11, just hours after China’s just as stunning one-time devaluation of the Yuan, the reality is that the Yuan… did not devalue much at all.
This is what we said precisely 4 months ago:
This morning’s Chinese record currency devaluation, in which the Yuan was devalued by 1.9% against the USD may sound like a lot… until one considers that the Chinese currency has been pegged to the US dollar, which as reported extensively over the past year, has exploded higher not so much due to the strength of the US economy but due to expectations of what may be the Fed’s biggest mistake in recent years: a rate hike which will assure the US economy’s tailspin into recession.
In effect what the PBOC did earlier today is inform the world it would no longer stay pegged to a Fed whose monetary intentions are complete lunacy for a mercantilist exporter, one whose economy is getting crushed as a result of the tight linkage between the USD and CNY, and even if it means massive capital flight as the opportunity cost, so be it. Furthermore, considering that the CNY was until recently the second most expensive currency according to Barclays, it is amazing it took Beijing this long to pull the plug.
We then accused the PBOC, which sought to assuage fears that it too was doing a “one and done” of lying:
how much more devaluation is in store for the CNY? Well, if one believes the PBOC, today’s intervention was a “one off.” The problem is that just like every central bank in modern history, the Chinese central bank is lying.
We proceeded to give a quick observation of what one can expect:
According to the PBOC press release, the unexpected change in fixing mechanism today was in response to the prospective Fed liftoff, which has the potential to cause further strengthening in the USD and capital flow volatility. The CNY on a trade weighted basis has appreciated sharply alongside the USD strength, and is still about 15% higher than a year ago after today’s move. However, we think a FX move of today’s scale, while significant by the standard of CNY’s historical movement, is unlikely to give a strong boost to growth.
In other words, today’s “devaluation” is a tiny pinprick in the grand scheme of the CNY’s revaluation since the USD surge started in 2014. This becomes especially apparent when one sees the impact of the CNY’s peg to the soaring USD, and last night’s shocking announcement, in context.
We then answered how much more downside in the CNY there is: “now that the PBOC has thrown in the towel and will aggressively devalue the currency, the answer is somewhere between 10 and 15% more if China wishes to regain its competitive status as of just last summer!”
To continue reading: What China’s Stunning Ammouncement Means
