Back in 2015, when the US Dollar started its striking ascent as the world began repricing the Fed’s upcoming tightening, China – whose currency is pegged to the dollar – had no choice but to gradually, or not so gradually, unpeg the Yuan from the world’s best performing currency as otherwise its exports to the rest of the world would plunge. In fact, it was precisely China’s tumbling exports (coupled with ongoing import weakness by the EU) which prompted us to correctly predict that China would devalue its currency, just days ahead of Beijing’s stunning announcement.
As we said on August 8, 2015, “as global trade continues to disintegrate, and as a desperate China finally joins the global currency war, it will have no choice but to devalue next.”
That’s precisely what it did.
Now, nearly two years later, China – in addition to a host of other problems – is facing the opposite issue: a dollar, to which it remains pegged, that has been rapidly declining in value, and is now not only at the lowest level since last October, the DXY is almost exactly where it was when China devalued in the summer of 2015. This may explain the surprpsing spike in Chinese currency volatility in recent days, coming after a period of unexpected calm and stability in the Yuan market. While the catalyst may have been last week’s Moody’s downgrade of China’s credit rating, followed by China’s decision to once again change its Yuan-fixing mechanism, introducing a “counter-cyclical factor”, or a mechanism allowing the PBOC to largely adjust the Yuan rate at will, the surge in the yuan against the dollar has been nothing short of breathtaking, and as we noted earlier today, the Chinese currency just had its biggest 4-day rally against the greenback in 12 years.
This post was published at Zero Hedge on Jun 1, 2017.