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Saturday, December 3, 2022

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Chinese Yuan Craters As PBOC Continues Stealth Devaluation With Weakest Fix In 14 Years

Back on March 30, when the downward move in the yen was only just starting, we explained why the “Yen Is At Risk Of “Explosive” Downward Spiral With Kuroda Trapped, And Why China May Soon Devalue.”

We won’t waste our readers’ time going into the details (they can click on the hyperlink above for the details), suffice to point out that since then, the yen has cratered by about 30 big figures…

… prompting the BOJ to intervene, in an act of futile desperation, in the FX market by blowing what now appears to be $50 billion (and rising fast) in open market yen purchases to contain the collapse of the currency. Of course, until and unless the BOJ ends YCC, all interventions will be completely pointless, and the USDJPY can easily hit 200 within the next 12 months unless Kuroda allows the 10Y yield to rise above 0.25%… which he won’t do as the alternative is an immediate bond market collapse.

But while the yen has been remarkable, it is the move in the yuan that has been the real stunner… just as we predicted. Behold the biggest stealth devaluation in modern Chinese history!

And tonight, one day after the biggest drop in US-traded Chinese stocks following the absolute revulstion to what happened in China over the weekend, it went from bad to worse for the offshore yuan which cratered as low as 7.3686, a relentless drop in recent days and the lowest level on record for the offshore yuan…

… which was sparked by the official fixing of the onshore yuan at 7.1668, which while still stronger than the estimate of 7.2198 (if well of record spreads observed in the past few weeks), was still the weakest reference rate in 14 years. In kneejerk reaction, the USDCNY, which is limited how far away from the reference rate it can trade, immediately proceeded to dump by 0.6% to 7.3050, the highest (i.e., weakest) since Dec. 2007.

Commenting on the move, Mizuho Bank Asia FX strategist Ken Cheung said that the yuan fixing at 7.1668 is “a clear sign of the PBOC letting go of the currency as outflow pressure mounts” adding that “the weaker fixing means the policies are going back to normal after the 20th party congress.”

Cheung also wrote that “the previous CNY fixing guidance could be a temporary measure and the PBOC is now letting the CNY to be more driven by market forces.”

Which begs just two questions: how long until the current stealth devaluation which has seen the yuan drop the fastest 15% on record, is called for what it is, especially when compared to the dwarf of an official devlauation that took place back in August 2015.

The second question: the last time China devalued aggressively – and officially – bitcoin saw its first sizable move from the low-hundreds into four digits. Will this time Beijing be successful at blocking off the capital flight firewall, or will those $55 trillion in Chinese bank assets finally starting moving out again…

This post was originally published on this site

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