The yuan (renminbi) is the Forex rock star these days. The USDCNY currency pair, dollar/yuan, weakens past 7 for the first time since 2008; over one decade ago. The escalation in the US-China trade war rhetoric exacerbates the move. USDCNY is the onshore yuan; China's domestic currency. The USDCNH pair is the offshore yuan and better reflects the yuan price if the currency was allowed to free float. USDCNY prints at 7.0325 and USDCNH at 7.0759. In actuality, the yuan would likely weaken far further past 7.5, maybe past 8 and even 9 if it was ever allowed to free float.
As the yuan weakens, the USDCNH dollar/yuan currency pair number increases. The yuan is in the denominator of the fraction, or ratio, so a lower number sends the ratio higher. A stronger yuan will send the USDCNH lower. Thus, the move above 7.0 popping to 7.05 reflects an ever-weakening yuan; the yuan is weakening against the US dollar.
The red-letter date is 8/5/19 when the yuan crosses 7. The 7 level has taken on immense importance as a line of demarcation for yuan bulls and bears to ponder and battle. The plot thickens. Treasury Secretary Mnuchin proclaims China to be a "currency manipulator." Of course, President Trump likely told Mnuchin to make that proclamation or he loses his job. Comically, if convenient, Trump will throw Mnuchin under the bus in the weeks and months ahead if things do not go well.
A country devalues its currency to gain an advantage with its exports. This helps boost the country's economy by adding manufacturing and support jobs for increased exports. Many times, this activity will jump-start a country out of an economic malaise. However, if everybody and his bro has the same idea, the situation can turn into throat-slitting protectionism.
Overnight, the RBNZ (New Zealand) cuts rates by a surprise 50 basis points (0.50%). The RBI (India) joins the party and cuts by 35 bips another surprise. India has cut rates four times this year. Not to be outdone, Thailand cuts its key rate to 1.50% which was not predicted by any analyst. Next up at bat is the Philippines tomorrow, which will cut rates, and then Peru will cut on Friday morning and then Australia, the RBA, which will likely cut in September. The world has gone batty under the decade-long global central banker intervention in markets. The race to the bottom is underway with countries slitting each other's throats competitively devaluing their currencies and cutting rates a la the 1930's.
As mentioned above, the yuan would likely weaken significantly if allowed to float, and this fact makes the 'currency manipulator' comment peculiar. Typically, a country is actively cutting rates and seeking to devalue their currency, as the central banker examples show, but China is a horse of a different color. The yuan wants to weaken so the communists are actually shoring up the yuan to prevent it from falling further. This is the wacky world we are in after a decade of corrupt humans destroying the planet's financial systems.
So Mnuchin's comment labeling China as a currency manipulator is not what you think. Who knows if people in leadership even understand any of this economic and market mumbo-jumbo. This being the case, China is between a rock and a hard place. When a country is devaluing its currency, it is typically not concerned with it falling too far where capital flight would become a concern. However, this is China's main worry. Sure, the communists benefit from the yuan weakening past 7.00 to perhaps 7.10, 7.20 and even 7.30, since their export market will receive a big shot in the arm, but the concern over capital flight is far greater.
China has clamped down in recent years at capital leaving the mainland. The commie leadership has put the kibosh on Chinese citizens buying American property. Very tight controls are implemented to prevent cash from leaving China. Of course people will always find ways to get their money out of the commie nation (because the government may take it at any time). The rally in bitcoin is a great example. Bitcoin pops nicely in recent days and you have to figure a lot of Chinese buyers would rather take their chances with the digital currency rather than their own government.
Interestingly, the correlation between the yuan and volatility (VIX) is at a 3-year high. In other words, as the yuan weakens (the USDCNH currency pair moves above 7 and higher), the VIX increases and visa versa, as the yuan strengthens, volatility subsides. A rising VIX correlates to stocks selling off and a falling VIX occurs when equities rally.
In summary, China is far more worried about capital outflows from their corrupt communist nation than the trade war or any US comments on currency manipulation. The worries over capital flight create an incentive for the Beijing leadership to prevent (not allow) the yuan from falling much past 7.00, 7.10 or 7.20. China will collapse into a financial crisis if the capital outflows become excessive.
China wants the yuan (renminbi) to develop into a major global reserve currency competing with the US dollar but instability and a collapse in the yuan would push this communist goal far into the future.
The weaker yuan offsets trade tariffs and worries but is a double-edged sword that may cut the communist's heads off if cash continues leaving China. The PBOC, China's central bank, is intervening in markets to prop-up its currency rather than aid it in weakening. That's funny. There will likely be lots of drama ahead at the 7 level for yuan but at least now you understand the game in progress.
It is key to watch the daily yuan fixing rate by the PBOC. Stocks may remain weak if the PBOC fixes the yuan rate above 7 (weaker yuan) but may rally if the communist central bank maintains the fix below the 7 currency pair number.
History may not repeat exactly but often rhymes. Trade wars, currency wars, protectionism and the race to the bottom are well underway around the world. Countries have the knives out and are starting to slit each other's throats a la the 1930's which extended the Great Depression. We are experiencing historic times. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.
Note: The chart is provided by XE which has great currency info and is annotated by Keystone.
Note Added 4:45 AM EST on Thursday Morning, 8/8/18: China sets the yuan midpoint at 7.0039 the first time it is set above 7 (reflecting a weaker yuan) since April 2008. The communists set the yuan midpoint at 6.9996 the day before a whisker from 7. China has now crossed the Rubicon and is allowing the yuan to weaken above 7 against the US dollar. Interestingly, US stocks stage a historic intraday turnaround in the Wednesday session. Futures are higher for the Thursday session. With the PBOC fixing the daily yuan rate above 7 for the first time in 11 years, the expectation would have been further selling in equities. Analysts, however, were expecting the yuan fix to come in at 7.0205 today far weaker than the 7.0039 announced by the PBOC. This is why stocks are rallying. It appears that China is perhaps setting a floor in the yuan. As discussed above, the communists are extremely concerned about capital flight out of China and a collapse in its currency so they are actually propping-up the yuan. As time moves along, and if further US tariffs are implemented against China, the PBOC would likely start fixing the yuan rate at weaker levels such as 7.01, 7.02 and 7.03. This behavior would likely result in a selloff in equities since the trade war, protectionism and bad will would be increasing between the US and China.
Note Added Monday Morning, 8/12/19: The PBOC fixes the yuan above the 7 level (weaker yuan) for three consecutive days. The currency war is underway.
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