The recent surge in the US dollar has again brought massive selling in the emerging market currencies, most notably the Chinese yuan. This has occurred twice before in the past 15 months and each prior instance has foreshadowed a 10% drop in the S&P 500. Therefore, are we on the verge of another stock market correction?
We’ve been alluding to this in the podcasts of late and I’ve been meaning to write about it with some illustrative charts. However, the metals have been so volatile that I haven’t had the opportunity. Today, with both gold and silver mostly flat on the session, I thought I’d seize the moment.
The problem for the Chinese is that the yuan is pegged to the US dollar. So, when the dollar strengthens…as it has for the past 60 days or so…the yuan strengthens, as well. The PBoC doesn’t like this very much as it makes their exports more “expensive”. It also creates a whole host of other issues, many of which are summed up in this excellent article I found at ZH last evening:
So, anyway, it’s the ripple effect of the Chinese yuan devaluation that has my interest. First of all, here’s a chart USDCNY chart that covers the last five years. Just like when the Japanese yen is portrayed by the USDJPY, a rising USDCNY means that the yuan is getting weaker versus the US dollar. Note that, even with the “peg” in place, the yuan has weakened by over 10% in the past three years.
This post was published at TF Metals Report on November 15, 2016.
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