Rumor of Chinese Yuan revalue increase risk
There are rumors of a China revaluation this weekend. Inflation is soaring in China and this is worrisome. The global imbalances are also more and more troubling. China and the US are finding that imbalances are not good for either party.
For the US, they have been enjoying low cost imports from China not to mentions China’s support in their massive debt market.
For China, they have relied on the US insatiable appetite for exports and have been happy with their systematic purchases of AAA rated US debt in return.
When the apple cart gets unstable, the happy times are quickly forgotten. The US points the finger at China for not opening up their markets and helping US manufacturers sell product there.
China points the finger at the US for running a weak dollar policy. With the even larger debt burden and political instability, S&P pulled the trigger and fired a warning “across the bow” with the negative watch. Suddenly the risk of sharply lower US treasury prices for China – the world largest holder of US debt - is not a great thing. What does happen to bond yields if the rating goes down?
Add the current inflation problem in China and it seems wheels are in motion for a possible change.
Another implication of a revalue is it moves the yuan closer to being a floating currency. This could upset the role of the dollar as the world’s reserve currency. That in and of itself is negative for the dollar and may be why the dollar continues to be weak and why gold/silver marches higher and higher.
Finally, if the Yuan goes higher versus the dollar, the cost of imported goods from China become more expensive all things being equal in the US (last I checked there are a lot of Made in China labels on many goods I purchase), while exports to China (all things being equal) are cheaper – that is the potential good. The adjustment does not have to be even however.
For example, what will the implications for US inflations be as a result? How far will the price of imported goods go? What will bond yields do? Will exports to China be fully open? If China/US has a more balanced balance of payments, will that imply less China support in US debt auctions? Will the US lawmakers make the necessary changes to budgets sooner, rather than later, to account for the potential of a buyer of debt becoming a less reliable buyer? or will the politicing continue?
There are a lot of balls in the air when talk of a revaluation makes its way in the market. What I warn is the risk will be elevated over the Easter weekend. Traders want to make the most money with the least amount of risk. With risk increased, at the very least adjust position sizes for that risk.
So be aware. Be prepared.
Loading ...
Great Analysis Greg. I don’t see many fundamental reasons for the EUR/USD trend…..but the trend is clear.
Thanks….If there is a reason to trade (i.e., a way to define risk from a technical perspective) the smart traders will use it. Trends are directional. Trends are fast. The burden of proof is on the bears to push it down. It is showing some cracks perhaps right now, but will see what happens at 1.4484 below (38.2 of the days range).
Considering that chinas currency will rise and kill off their exports, thus reducing Americas huge current account deficit. How is that bad for the dollar?
Seems like a terrible event for risk currencies, especially AUD
The question is do we manufacture those goods here or have we relied on the cheaper goods from China and killed off the US businesses in the process. Also if prices go up 8%, is it enough to make their goods more expensive than US goods. So if underwear from China is 8% higher but is still the low cost supplier because the US don’t manufacture it or it still is not cheaper, the cost increase goes into inflation….Remember…The US killed manufacturing under the assumption it did not matter – China would manufacture all the goods for us with their cheap labor. We would be better off because we had low inflation, it put more money in our pockets. We could spend, spend, spend and and borrow, borrow, borrow. Whoops. THe US borrowed, borrowed, borrowed right into a collapsing housing market.
It takes time to kill businesses. It takes time to rebuild them too….. The implications are unknown and multifaceted. What is negative is the potential loss of the $ as the reserve currency, and if China exits as a buyer of debt, while US government makes slow progress toward deficit reduction. Who is going to buy the bonds that have to be funded?
Now… if you know me, the fundamentals are the most difficult way to trade. I still want to make decisions on technicals first and let the stories be written in the newspapers. However, what I can say is risk is increased in this potential environment. IF it were to happen, there is enough ambiguity (as you suggest/imply by your thoughts) that can take the dollar lower or higher. I can assure you, the story will be written explaining what the implications are – in much the same way the earthquake/tsunami story was repatriation until it was not repatriation. But if risk is increased over the holiday weekend, don’t bet Red or Black. The reward might be good if you are lucky, but the loss might wipe you out. The goal is to make it to tomorrow. So “listen” to what the market is saying….
Actually, I have a project about the revaluation of the Yuan and I am looking for some answers for this topic. I searched and I found that it was generally for the economy to be revalued but I could not find the following:
If the Chinese yuan were to change by the max allowed per day , 0.3% against the US dollar, consistently over a 30-60 day period, what extreme values’s might it reach ?
and:
Many Chinese critics had urged China to revalue the yuan by 20% or more. What would the Chinese yuan’s value be in dollars if it had indeed been devalued by 20% ?
If the pair lost 0.3% per business day for a month, the value would go from 6.3661 to 6.049
20% would take the price from 6.3661 to 6.3337 area (20 business days). If each day the currency increased 0.3% for two months (40 business days), the value would fall to 6.2958.
These are just estimates. I am simply doing the math but please check your own calculations.