Tag Archives: Currencies

What Will China Dump Next, After Treasuries, to Keep Control? by Wolf Richter

From Wolf Richter at wolfstreet.com:

“Practically boundless” future capital outflows.

“Beneath all of the financial turbulence there lurks, in my view, a credit crisis; I fear the worst now,” UBS economic adviser George Magnus told Bloomberg TV today. The reform agenda “has stalled,” he said, and “things are looking much bleaker for China going forward.”

And so on Monday, we got another flavor of it.

The Shanghai Composite index plunged 5.3%, to 3016, down 15% so far this year. The Shenzhen Composite fell 6.6%. Hong Kong’s Hang Seng fell 2.8% to 19888, below 20000 for the first time since June 2013, and down 30% from its April high.

Everyone had hoped that China’s “National Team” would jump into the fray and bail everyone else out, but it didn’t. And the People’s Bank of China didn’t offer any big new remedies either. But it did stabilize the yuan after it had dropped 1.5% against the dollar last week, and about 6% since mid-August.

In Hong Kong, interbank yuan lending rates broke all records since the Treasury Markets Association started compiling the data in June 2013, with the overnight Hong Kong Interbank Offered Rate spiking 939 basis points to 13.4%.

And copper did it again, ratting on China’s real economy. Copper goes into anything from skyscrapers to smartphones. China is the world’s largest copper consumer, accounting for over 40% of global demand. And on Monday, copper dropped 2.6% to $1.97 per pound, the lowest level since May 2009.

Buffeted by, among other things, fears about slowing demand from the industrial sector in China, oil plunged – with WTI down 6.1% to $31.13 a barrel

To prop up the yuan and counter the impact of capital flight, China had dumped $510 billion of foreign exchange reserves last year, drawing them down to a three-year low of $3.33 trillion. And that was just the beginning.

To continue reading: What Will China Dump Next?

How Beijing and the West Work Together to Manipulate the Global Currency War, by Brendan Brown

From Brendan Brown at mises.org:

From reading the commentaries you might have imagined that the process of a currency winning international reserve status depends on getting the IMF seal of approval. At least that seems to be the story with China.

So, strange to tell, the great international monies of the past evolved either before the IMF was created or without its help. Think of the Deutsche mark and Swiss franc — the two upstarts of the 1970s and 1980s — or briefly the Japanese yen when it enjoyed great popularity. Their emergence was due to the path of monetary stability chosen by their issuing authorities together with complete freedom from restrictions.

So why is the world of currency diplomacy now playing along with the nonsense of the IMF examining whether the Chinese yuan has met the criterion to become a reserve currency?

Incidentally, the last time that Washington body bestowed “reserve currency status” it was with respect to the Australian dollar and Canadian dollar, on the eve of the bust for the respective commodity and carry trade bubbles which sent them to their respective skies.

Beijing and DC Pick the Winners and Losers

The question as to why the Western world is playing along with the official Chinese currency charade is part of a more general point. Why do Western governments pursue non-market trade diplomacy so enthusiastically with Beijing?

Think of the repeated times that Chinese communist party dictators traveled to a particular Western capital to hand out their list of chosen beneficiaries of Chinese corporate (mostly state) spending. These dictators were welcomed by fawning officials and bureaucrats who assured us that they also brought up, with muted whispers and inaudible comments, the problem of human rights to their guest.

And, by the same token, why are there high profile visits of Western leaders to China, presenting their own list of chosen industrialists selected to pick up the new business deals? This is not the way free markets, and global free trade, in particular, is meant to work.

If it smells like a rat it probably is a rat, and so it is with respect to these deals by collusion between China and Western governments, and their chosen corporate protégés, whether on currency or trade or investment matters. This is all an exercise in some combination of crony capitalism (with cronies on both sides!) and diplomacy by stealth. The gains and gainers are deliberately kept opaque. The losers are much less evident than the gainers, on whichever side of the fence, but principle and practice tells us that the total losses are much larger than the gains.

To continue reading: How Beijing and the West Work Together to Manipulate the Global Currency War

China Officially Sold A Quarter Trillion Treasurys In The Past Year (Unofficially Much More) And What This Means, by Tyler Durden

Tyler Durden, at zerohedge.com, explains Quantitative Tightening:

Back in May, this website was the first to explain the “mystery” behind Belgium’s ravenous Treasury buying which in early 2015 had turned into sudden selling, and which we demonstrated was merely China transacting using offshore Euroclear-based accounts to preserve anonymity. Since then theme of Belgium as a Chinese proxy has become so popular, even CNBC gets it.

Consequently, we were also the first to correctly warn that China had begun liquidating its Treasury holdings (a finding which left none other than Goldman “speechless”), which also helped us predict that China is about to announce its currency devaluation three days before it happened as the conversion of Chinese reserves from inert paper to active dollars hinted at a massive effort to stabilize the currency, and thus unprecedented capital outflows.

As a result, the only data point which mattered in yesterday’s Treasury International Capital data release was not China’s holdings, which actually “rose” $1.7 billion in the month when China actively devalued its currency and then spent hundreds of billions to prevent the devaluation from becoming an all out FX rout, but the ongoing decline in Belgium holdings. As the chart below shows, Belgium, pardon Euroclear – which is a clearing house not only for China but many other EM nations who park their reserves in Belgium – sold another $45 billion in Treasurys last month, bringing the total to a dangerously low $111 billion, down from $355 billion at the start of the year.

Lumping Belgium and China holdings into one, as we have done since May, shows that as expected, Chinese selling continued in August, and the result was another drop of $43 billion in TSY holdings in the month of August, which incidentally mirrors perfectly the previously announced decline in September Chinese FX reserves, which according to official data declined from $3.557 trillion to $3.514 trillion.

According to the chart above, while to many Quantitative Tightening is a novel concept, the reality is that China (+ Euroclear) have been dumping Treasurys and liquidating reserves since January when total holdings peaked at $1.6 trillion last summer, and have since declined to $1.38 trillion. It means that China has sold a quarter trillion dollars worth of Treasurys in the past year, in the process offsetting what would have been about 25% of the Fed’s QE3.

To continue reading: China Sold A Quarter Trillion Treasuries In The Past Year

Emerging Nations Trimming $5 Trillion Debt Stokes Currency Risk, by Andrea Wong

This is how debt contractions start. From Andrea Wong at bloomberg.com:

First net repayment of dollar loans since 2008 in 3rd quarter
Dollar demand from companies puts pressure on local currencies

Borrowers in emerging markets have started to address a $5 trillion mountain of dollar-denominated bonds and loans, reducing their obligations for the first time in seven years in a move that threatens to cut short a budding rally in currencies from Brazil to Malaysia.

Companies in developing nations paid back $38 billion of dollar debt last quarter, $3 billion more than they borrowed in the period and marking the first reduction in net issuance since 2008, according to data compiled by Bloomberg. Demand for greenbacks among borrowers needing the currency to repay debt is contributing to the largest capital outflows in almost three decades.

The borrowing binge, which took off in the wake of the global financial crisis as interest rates tumbled, may now be reversing as economic growth slows, commodity prices fall and lenders demand higher yields. While developing-nation currencies are rebounding from their record lows, analysts surveyed by Bloomberg expect the depreciation trend to resume as dollar debt repayments accelerate.

“This is a massive event,” said Stephen Jen, the co-founder of London-based hedge fund SLJ Macro Partners LLP and a former economist at the International Monetary Fund whose bearish call on emerging markets since 2012 has proven prescient. “They want to pay down their dollar loans. We are early in the game, there’s pretty intense pressure on emerging markets.”

To continue reading: Emerging Nations Trimming $5 Trillion Debt

The Death Of Cognitive Dollar Dissonance & The Remonetization Of Gold, by John Butler

This is an excellent article and well worth reading in its entirety. From John Butler at The Amphora Report, via zerohedge.com:


Two years ago, prior to travelling to Sydney to present at the Annual Precious Metals Symposium, I prepared an article for the Gold Standard Institute Journal titled Cognitive Dollar Dissonance: Why a Global De-Leveraging Requires the De-Rating of the Dollar and the Remonetisation of Gold (see here). This article highlighted the growing inconsistency between those arguing on the one hand that the dollar’s role in international trade and finance was clearly diminishing; yet denying that it was in any danger of losing the near-exclusive monetary reserve status it has enjoyed since the 1940s.

This apparently contradictory yet mainstream thinking about the future of the international monetary system continues to the present day. Indeed, earlier this month the Economist magazine ran a special feature on fading US economic power replete with dollar dissonance. The experts cited note the accelerating trend towards bilateral trade settlement, say between Russia and China, who plan to finance their multiple ‘Silk Road’ infrastructure projects using their own currencies and their own development bank (The Asian Infrastructure Investment Bank or AIIB: See http://www.aiib.org/). They also observe that Russia, China and the other BRICS are no longer accumulating dollar reserves (although curiously overlook that they continue to accumulate gold). They acknowledge that not only the BRICS but many other countries have repeatedly expressed their desire that the current set of global monetary arrangements should be restructured in some way, although they are not always clear as to their specific preferences.

Note the sharp contrast in these two paragraphs, both on the very same page of the Economist feature:

“This special report will argue that the present trajectory is bound to cause a host of problems. The world’s monetary system will become more prone to crises, and America will not be able to isolate itself from their potential costs. Other countries, led by China, will create their own defences, balkanising the rules of technology, trade and finance. The challenge is to create an architecture that can cope with America’s status as a sticky superpower.”

“Today’s world relies on a vastly bigger edifice of trade and financial contracts that require continuity. Trade levels and the stock of foreign assets and liabilities are five to ten times higher than they were in the 1970s and far larger than at their previous peak just before the first world war… China and America are not allies. The greater complexity and risk involved in remaking the global order today create a powerful incentive for current incumbents to keep things as they are.”

Does anyone else hear the clear dissonance, confusion even? On the one hand we have a complex system prone to debt and currency crises, a growing lack of cooperation between the two largest players and a need for a ‘new architecture’. Yet on the other we are supposed to accept that there is sufficient common incentive to cooperate in monetary matters? Really?

To continue reading; The Death Of Cognitive Dollar Dissonance

The Clock Is Ticking On The U.S. Dollar As World’s Reserve Currency, by Henry Hewitt

From Henry Hewitt at oilprice.com:

The View From Hubbert’s Peak

In 1971, the American President put an end to a 2,500 year trend; the Wall Street Journal called it “Nixon’s Worst Weekend.” Considering the old boy had some really bad ones, this must have been something special. In August of that year (on Friday the 13th) it was decided that the U.S. would no longer pay out gold for its paper dollars. OPEC Ministers took note, and in September they met, deciding it would be necessary to collect more paper dollars, if possible, since gold was no longer on offer and oil was the only asset they had to sell.

It would take another two years for those decisions to matter (during the October 1973 embargo in the wake of another Arab-Israeli war). The Oil Embargo marked the end of ‘free’ energy, and kicked off a massive rise in the price of oil because the U.S., the world’s swing producer since Colonel Drake’s Pennsylvania strike in 1859, had finally reached peak production at around 10 million barrels per day in 1970. This moment is the original Hubbert’s Peak, the beginning of decline for the U.S. oil industry, at least until recently. The surge in U.S. production since 2010 has stalled out around 9.5 mb/d and, due to the Saudi decision to give the American tight oil producers ‘a good sweating,’ that rate has begun to fall in the last few months.

It is certainly possible that U.S. production will surpass the 1970 peak, but with low prices it is hard to say when that will be; it is also hard to say how long that will last as tight oil wells have a devilishly high rate of decline. It is worth noting, as Arthur Berman has recently done in his fine article, that even the best producers are losing money now, and lots more are being lost by those who are not the best. Making it up on volume is a dog that does not hunt for $45.

The Wizard of Oz

The ultimate irony for this generation of investors is that, despite the occasional obligatory chant about ‘free markets’ and the wonders of capitalism, most of the day is spent obsessing about what the world’s most important central planner will do next. By Supreme Central Planner, I mean, the Fed.

To continue reading: Clock Ticking on US Dollar as World’s Reserve Currency

World Is Now “More Exposed than Ever” to Explosive Dollar, by Wolf Richter

The debt contraction finds the foreign debtors carrying almost $10 trillion in dollar-denominated debt, which means they’re short the dollar. The dollar’s 18 percent rise since June of last year is inflicting a lot of pain. From Wolf Richter at wolf street.com:

One of the craziest financial creations on earth, available only near the peak of enormous credit bubbles when nothing can ever go wrong, became available this spring: 100-year bonds issued by governments or companies in emerging countries, in currencies they don’t control.

Yield hungry investors in developed markets who purposefully had been driven to near-insanity and drunken benightedness by the zero-interest-rate policies of central banks around the globe jumped on them. For them, it was the way to nirvana.

At the peak of Draghi’s QE hype in April, Mexico, which has a long history of debt crises, was able to sell €1.5 billion of 100-year bonds denominated in euros because yields were even lower in the Eurozone and bond fund managers there even more desperate and insane; at a ludicrously low yield to maturity of 4.2%.

Even more inexplicable was just how Petrobras, Brazil state-controlled oil company, was able to bamboozle investors on June 2 into buying its 100-year dollar-denominated bonds.

At the time, the company had just ended a five-month delay in releasing its financial statements. It’s tangled up in a horrendous corruption scandal that has reached the highest echelons of political power. It’s backed by the Brazilian government whose credit rating, as everyone had been expecting for months, was cut to junk last week by Standard and Poor’s. To top it off, Brazil has been facing a deep recession and a plunging currency, which makes paying off dollar-denominated debt prohibitively expensive.

And it renders that debt toxic.

Petrobras, whose credit rating was cut to junk the day after Brazil’s – though Moody’s had cut it to junk seven months ago – faces other, even bigger problems: over $130 billion in debt, the most of any oil company, and the terrific collapse in oil prices.

OK, in the second quarter, oil rallied sharply, and some bond-fund folks might have thought that the oil bust was over though the entire world was still practically swimming in oil. And amidst this buoyant mood about Petrobras’ prospects, the company was able to sell $2.5 billion of 100-year dollar-denominated 6.85% bonds to fund managers in the US and elsewhere who were blinded by their own optimism and driven to insanity by years of zero-interest-rate policies.

Now, three months later, these “century bonds” have gone to heck.

The three largest holders of these bonds are Pacific Investment Management, Fidelity, and Capital Group, according to Bloomberg. After Petrobras’ credit rating was cut last week, the bonds traded at 69.5 cents on the dollar.

That’s a big loss for these geniuses, or rather for their clients, in just three months.

To continue reading: World Is Now “More Exposed than Ever” to Dollar

The Next Financial Crisis Won’t be Like the Last One, by Charles Hugh Smith

From Charles Hugh Smith at oftwominds.com:

It seems increasingly likely the next Global Financial Meltdown will arise in the FX/currency markets.

Central banks are like generals: they tend to fight the last war. The Great Financial meltdown of 2008 was centered in too big to fail, too big to jail transnational banks and other financial entities with enormous exposure to collateral risk (such as subprime mortgages), highly leveraged bets and counterparty risk (the guys who were supposed to pay off your portfolio insurance vanish in a puff of digital smoke, leaving you to absorb the loss).

In response, the central banks and treasuries of the major economies “did whatever it took” to save the private banking sector from insolvency and collapse. In effect, central banks launched a multi-pronged bailout of banks and other financial heavyweights (such as AIG) and hastily constructed a clumsy and costly Maginot Line to protect the now-indispensable private banks from a similar meltdown.

The problem with preparing to fight the last war is that crises arise not from what is visible to all but from what is largely invisible to the mainstream.

The other factor is what’s within the power of central banks to fix and what’s beyond their power to fix. Correspondent Mark G. and I refer to this as the set of problems that can be solved by printing a trillion dollars. It’s widely assumed that virtually any problem can be fixed by printing a trillion dollars (or multiple trillions) and throwing it at the problem.

Yes, the looming student-loan debacle can be fixed by printing a trillion dollars and paying down a majority of the existing student debt.

But lots of other problems are not fixed by printing a trillion dollars. Printing $1 trillion can pay for a lot of make-work jobs, but that’s not the same as boosting employment in a sustainable, organic fashion.

The ocean’s fisheries will not magically come back from being stripmined if a central bank prints $1 trillion. If the $1 trillion is spent wisely, perhaps in a decade or two fisheries can recover. But neither employment or ecosystems can be “saved” by printing money and throwing it at the usual vested interests.

So what else is beyond the easy fix of a quick $1 trillion printing/bailout? How about the foreign exchange (FX) market? Many a government and central bank has attempted to fix the foreign exchange market, but they fail for the simple reason that the FX market is too large to control for long.

To continue reading: The Next Financial Crisis Won’t be Like the Last One

Europe’s Biggest Bank Dares To Ask: Is The Fed Preparing For A “Controlled Demolition” Of The Market, by Tyler Durden

SLL would not put anything past central banker, including a “controlled demolition,” although it is doubtful that they could keep such a demolition within the desired parameters. From Tyler Durden at zerohedge.com:

Why did we focus so much attention yesterday on a post in which the IMF confirmed what we had said since last October, namely that the BOJ’s days of ravenous debt monetization are coming to a tapering end as soon as 2017 (as willing sellers simply run out of product)? Simple: because in the global fiat regime, asset prices are nothing more than an indication of central bank generosity. Or, as Deutsche Bank puts it: “Ultimately in a fiat money system asset prices reflect “outside” i.e. central bank money and the extent to which it multiplied through the banking system.”

The problem is that the BOJ and the ECB are the only two remaining central banks in a world in which Reverse QE aka “Quantitative Tightening” in China, and the Fed’s tightening in the form of an upcoming rate hike (unless the Fed loses all credibility and reverts its pro-rate hike bias), are now actively involved in reducing global liquidity. It is only a matter of time before the market starts pricing in that the Bank of Japan’s open-ended QE has begun its tapering (followed by a QE-ending) countdown, which will lead to devastating risk-asset consequences. The ECB, which is also greatly supply constrained as Ewald Nowotny admitted yesterday, will follow closely behind.

But while we expanded on the Japanese problem to come in detail yesterday, here are some key observations on what is going on in both the US and China as of this moment – the two places which all now admit are the culprit for the recent equity selloff, and which the market has finally realized are actively soaking up global liquidity.

Here the problem, as we initially discussed last November in “How The Petrodollar Quietly Died, And Nobody Noticed“, is that as a result of the soaring US dollar and collapse in oil prices, Petrodollar recycling has crashed, leading to an outright liquidation of FX reserves, read US Treasurys by emerging market nations. This was reinforced on August 11th when China joined the global liquidation push as a result of its devaluation announcement, a topic which we also covered far ahead of everyone else with our May report “Revealing The Identity Of The Mystery “Belgian” Buyer Of US Treasurys”, exposing Chinese dumping of US Treasurys via Belgium.

We also hope to have made it quite clear that China’s reserve liquidation and that of the EM petro-exporters is really two sides of the same coin: in a world in which the USD is soaring as a result of Fed tightening concerns, other central banks have no choice but to liquidate FX reserve assets: this includes both EMs, and most recently, China.

Needless to say, these key trends covered here over the past year have finally become the biggest mainstream topic, and have led to the biggest equity drop in years, including the first correction in the S&P since 2011. Elsewhere, the risk devastation is much more profound, with emerging market equity markets and currencies crashing around the globe at a pace reminiscent of the Asian 1998 crisis, while in China both the housing and credit, not to mention the stock market, bubble have all long burst.

To continue reading: Is The Fed Preparing For A “Controlled Demolition”?

Crisis Progress Report (11): The Dark Side

The perpetually bullish yammer on, but recognition of two realties spreads. Recent financial market perturbations are more than just a “healthy correction,” or a “pause that refreshes,” to use two phrases beloved by media touts. Markets are catching on to the inchoate reversal of the largest and longest-lasting debt bubble in history. Crashing natural resources prices, increasing credit stress, imploding export-based economies, gluts of commodities and manufactured goods, and collapsing world trade have become too much to ignore.

And in what amounts to tentative repudiation of a widely and tenaciously held faith, the realization dawns that the biggest governmental debt spree in history, and unprecedented central bank monetization and interest rate suppression, have had no effect on the real economy. They have only served as addictive crack cocaine for debt and equity markets. Like crack, they have wreaked immense damage: mis-pricing interest rates, thus fueling malinvestment and overconsumption, and destroying the incentive to save, the foundation of true economic progress. Acknowledgement of governmental and central bank impotence is a sea change that will have to satisfy those of us who have been making that point for years. Down the road a chastened few of the acolytes may admit the immensely destructive consequences of their faith, but don’t hold your breath.

Although there have been some reluctant murmurings acknowledging past ineffectuality, paradoxically, the belief persists that more debt, monetization, and suppression will stop the “healthy correction” from becoming a rout. These whistlers past the graveyard, shielded from reality and consequences for so long, have—to borrow from Darth Vader—no idea of the power of the Dark Side of Debt. All the governments and central banks of the world, with all their “macroeconomic tools,” will be as effective as a Boy Scout troop with shovels and superglue would be trying to repair a gaping fissure in Hoover Dam.

The US has run perpetual trade deficits, which have been promoted by US economic policy. Government debt, and central bank debt monetization and interest rate suppression, have spurred consumption and investment, which draws in imports of consumption and capital goods. Normally a trade deficit will weaken a currency. Imports will become more expensive and exports less expensive, an automatic corrective. However, the US has the world’s reserve currency, provides much of its defense, and is the largest export market, so a flaccid dollar is in nobody’s interest. The rest of the world has soaked up the debt-based dollar flood with liquidity creation of its own, with much of the dollar accumulation invested in US assets. In effect, the US has exported its debt promotion policies.

The end of quantitative easing in the US and the drawn out drama of raising an overnight interest rate a mere twenty-five basis points may be tacit acknowledgment by Fed officials that the US and global economy are saturated in counterproductive debt. That’s probably giving them too much credit, but it is clear that even at low interest rates, the burden of debt service now outweighs any benefit from the consumption or investment it funds. It is also clear that low interest rates have promoted carry trade speculation that has driven bond and equity prices to bubble valuations untethered to the weakening real economy.

Global debt that can no longer expand will necessarily contract. Debt contraction first manifests itself in the most overly leveraged sectors of the global economy. In 2006, it was the US housing and mortgage finance sectors; this time it was natural resources (see “Oil Ushers in the New Depression,” and “The Shape of Things to Come,”). The natural resources boom got its impetus from the Chinese boom; both were fueled by super-abundant cheap debt. Debt contraction in China has closed followed contraction in the natural resources sector.

Debt contraction, with its attended economic contraction and falling asset prices, is leading to all sorts of untoward consequences, in China and elsewhere. Chinese economic policy has taken a bizarre turn, with the government visibly promoting a stock market bubble, discouraging some types of credit and encouraging others, and devaluing the yuan while simultaneously trying to maintain its value (to discourage capital flight) by selling its US assets, using its dollar reserves to buy yuan.

This puts downward pressure on US equity and bond prices. Further pressure is coming from the governments of oil exporting nations. They too are liquidating their US assets, built up over the years via petrodollar recycling, in order to maintain revenues cut by the fall in oil’s price.

With the end of quantitative easing and a rate hike in the offing, the dollar has strengthened. Foreign governments and companies that have borrowed in dollars, assuming the dollar would stay weak, are getting crucified, as they must pay their debt with more expensive dollars. As debt shrinks, so too does speculative liquidity; stock markets are faltering and credit spreads are widening, even for investment grade debt.

All this economic and financial stress and the credit contraction is still in its infancy! The descent is always much quicker than the ascent. Daisy chains of debt will topple like dominoes in a line. As the stress intensifies, look for a crash. SLL has noted, “much of the global economy is a mirage,” (“A Skyscraper of Cards”) based as it is on decades of debt growth that has far exceeded actual economic growth. The coming collapse will have epochal consequences. War, revolution, succession, changing political boundaries, anarchy, police states, rampant lawlessness, and widespread chaos are all possibilities. Recovery, if there is one, will be a long, arduous, and drawn-out affair, not one of those familiar—and phony—V-shaped, government- and central bank-engineered con jobs.

SLL has used the following quote before, in “A Skyscraper of Cards” last October, and it is appropriate here. Washington Irving wrote The Great Mississippi Bubble in 1820.

Every now and then the world is visited by one of these delusive seasons, when “the credit system,” as it is called, expands to full luxuriance, everybody trusts everybody; a bad debt is a thing unheard of; the broad way to certain and sudden wealth lies plain and open; and men are tempted to dash forward boldly, from the facility of borrowing….Every one now talks in thousands; nothing is heard but gigantic operations in trade; great purchases and sales of real property, and immense sums made at every transfer….Speculation is the romance of trade, and casts contempt upon all its sober realities….a panic succeeds, and the whole superstructure, built upon credit and reared by speculation, crumbles to the ground, leaving scarce a wreck behind: ‘It is such stuff as dreams are made of.’

History does indeed repeat itself.