Announcement

**bsteadman** · 08-11-2015, 06:01 PM

What yuan move means for September Federal Reserve rate hike

MarketWatch
Sara Sjolin
8/11/2015

Excerpt:

Analysts fear PBOC move has restarted currency wars

China’s central bank devalued its tightly controlled currency early Tuesday, fueling speculation that the move could delay the first interest-rate hike by the Federal Reserve in nearly a decade.

The yuan suffered its largest one-day loss in two decades following the surprise move, with the dollar jumping to buy 6.3294 yuan, according to FactSet. That’s up from around 6.2058 earlier on Tuesday. The yuan had been trading in a tight range in recent months, mainly due to Beijing’s intervention in the foreign exchange market. Read: China ramps up the risks for investors and its economy

The dollar’s strength against major global currencies has taken a toll on U.S. exports in recent quarters, and the Fed is closely watching the effects on the economy as it debates whether to raise interest rates, a move that could make the dollar even more appealing.

The People’s Bank of China’s decision to allow the yuan to devalue by 1.9% is feared by some to be the opening salvo in a new currency war. The Chinese central bank stressed the move was a one-off depreciation to allow its currency to be driven more by market forces, but analysts fear the PBOC has more moves up its sleeve. Read: China’s surprise can keep the market’s Fed-fueled party going

Here are some analysts’ initial assessments of the devaluation:

“The question now is whether other central banks will follow suit and devalue their own currencies in some way in an attempt to ring-fence their own export markets, something that could further harm U.S. companies. They are already facing a battle to compete as a result of the strong dollar, which was likely to be further hampered by a rate hike from the Fed when it raised rates... A [Fed] rate hike this year already appeared to be on a knife edge, this could be enough to tip it over into next. That may now depend on the actions of other central banks.” — Craig Erlam, senior market analyst at Oanda

“What is of interest is how the U.S. will react to this move. It will almost certainly cause [Fed Chairwoman] Janet Yellen and the Fed more problems and could possibly kill off the September rate hike, as any further gains by the U.S. dollar could cause more problems for the U.S. economy... . It is clear that the ‘currency war’ is back, which will make the next few weeks very interesting.” — Nour Al-Hammoury, chief market strategist at ADS Securities

“It’s quite likely that the larger-than-expected fall in exports in July that was announced over the weekend had something to do with the move. I’ve been saying for some time now that the slowdown in global trade, plus the deflationary pressures from falling commodity prices (which themselves may be just a symptom of falling demand, too) would be likely to restart the ‘currency wars.’ Now we have the first shot fired. Although China said this was a one-off move, other countries are likely to be wary. Who will be first to react?”

“I doubt if it will derail the Fed’s plans to tighten, but it may well slow the pace of their tightening. It could have a bigger impact on the actions of the Bank of England, where the mandate is focused entirely on inflation. ” — Marshall Gittler, head of global FX strategy at IronFX

“Coming on the back of yet another set of poor export readings, the timing of the move is certainly not ‘happenstance’ and per se raises the suspicion that this was far from a ‘one-off’ move... Let us also not forget that China’s Real Effective Exchange Rate (REER), as calculated by the [Bank for International Settlements], has risen by some 14% in the past year, today’s 2% drop pales into insignificance. Of course, markets that are already fretting about Fed rate liftoff will not appreciate this surprise, but in truth, this has been coming for quite some time.” — Marc Ostwald, FX strategist at ADM Investor Services
..........................................

View the complete article, including images, at:

http://www.marketwatch.com/story/ret...ion-2015-08-11

**bsteadman** · 08-11-2015, 06:27 PM

Gold Soars After Chinese Currency Devaluation -- Zero Hedge, Tyler Durden

Gold Soars After Chinese Currency Devaluation

Zero Hedge
Tyler Durden
8/11/2015

Excerpt:

Yesterday, immediately in the aftermath of the PBOC's dramatic devaluation announcement, we remarked the following:

To be sure, while it will take the Chinese mainland a few more hours to realize just what happened, and that once you unleash the devaluation genie in a global currency war you can't simply put it back in, which means over one billion Chinese will soon be scrambling to preserve their purchasing power (but not in the stock market which particular bubble burst just last month and taught millions a very harsh lesson in get rich quick schemes), some fast thinkers realized that not only will capital outflows explode in the coming weeks and months, but that holding one's savings in Yuan will be, well, foolish.

As a result, after initially tumbling for some inexplicable reason after the PBOC announcement, gold is now soaring back to levels from mid-July and going higher.

Here we eagerly await as the BIS' Benoit Gilson sells a few billion in paper gold just to reset the price of gold lower as a surge in gold, and a loss of faith in paper money, at this juncture in just broken out global currency wars, is the last thing the central banks' central bank can afford.

But wait, there's more: because any day now the PBOC will update its revised foreign reserve and gold holdings. And so the next big leg up in gold will take place when it is revealed that the PBOC had only exposed a portion of its "new" total gold inventory, and that with every passing month it will simply reveal more and more as central-planning conditions demand it.

View the complete article, including image, at:

http://www.zerohedge.com/news/2015-0...cy-devaluation

**bsteadman** · 08-12-2015, 02:25 AM

Presidential candidate Trump: China devaluation will devastate US

Reuters
Brian Snyder | Reuters
8/11/2015

Excerpt:

Republican presidential candidate Donald Trump on Tuesday said China's devaluation of the yuan would be "devastating" for the United States.

"They're just destroying us," the billionaire businessman, a long-time critic of China's currency policy, said in a CNN interview.

"They keep devaluing their currency until they get it right. They're doing a big cut in the yuan, and that's going to be devastating for us."

Earlier on Tuesday, China devalued its currency following a series of poor economic data in the yuan's biggest fall since 1994. Some said this could signal a long-term slide in the exchange rate.

China has been a frequent theme for Trump since he entered the 2016 presidential campaign, promising to be a tougher negotiator with Beijing in order to bolster the U.S. economy.
.................................................. .......

View the complete article, including image, at:

http://www.cnbc.com/2015/08/11/presi...astate-us.html

**bsteadman** · 08-12-2015, 03:11 PM

China lets yuan fall further, fuels fears of currency war

Reuters / Shanghai
Pete Sweeney and Lu Jianxin
8/12/2015

Excerpt:

China's yuan hit a four-year low on Wednesday, falling for a second day after authorities devalued it, and sources said clamor in government circles to help struggling exporters would put pressure on the central bank to let it drop lower still.

Spot yuan in China slid to as low as 6.4510 per dollar, its weakest since August 2011, after the central bank set its daily midpoint reference at 6.3306, even weaker than Tuesday's devaluation.

The currency fared worse in international trade, touching 6.59 to the dollar.

The central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets on Wednesday that it was not embarking on a steady depreciation.

The devaluation had sparked fears of a global currency war and accusations that Beijing was unfairly supporting its exporters.

"Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan," the People's Bank of China (PBOC) said.

Foreign exchange traders later said state-owned banks were selling dollars on behalf of the PBOC, and the spot market ended at 6.3870, after rallying strongly towards the close, which will influence Thursday's midpoint.

"Apparently, the central bank does not want the yuan to run out of control," said a trader at a European bank in Shanghai.

Analysts at BMI downgraded their year-end forecasts for the currency to 6.83, down 10 percent from pre-devaluation levels.

The yuan has lost 3.5 percent in China in the last two days, and around 4.8 percent in global markets.

Its slide pulled down other Asian currencies on Wednesday, with Indonesia's rupiah and Malaysia's ringgit hitting 17-year lows, and the Australian and New Zealand dollars touching six-year lows.

Indonesia's central bank pinned the rupiah's fall directly on the yuan devaluation and said it would step into the foreign exchange and bond markets to curb volatility.

The Russian rouble hit a six-month low, tracking a fall in the price of oil, of which Russia is a major producer. Crude fell on Tuesday on questions over Chinese demand.

Stocks fell again in Asia and Europe. The pan-European FTSEurofirst 300 losing 2.3 percent, with German carmakers BMW and Daimler down even more.

Wall Street also opened lower.

Investors sought safety in top-rated government bonds, driving yields on German two-year bonds to a record low and pushing U.S. Treasury yields down as some analysts said a long-awaited Federal Reserve interest rate hike may be delayed.

POOR ECONOMIC DATA

Tuesday's devaluation, the biggest one-day fall since 1994, followed a run of poor economic data and raised market suspicions that China was embarking on a longer-term slide in the exchange rate that would make Chinese exports cheaper.

Last weekend, data showed an 8.3 percent drop in exports in July and that producer prices were well into their fourth year of deflation.

China's Ministry of Commerce acknowledged on Wednesday that the depreciation would have a stimulative effect on exports.

In an early sign of its impact, some Chinese steel producers have already cut export prices in response to the lower yuan.

Sources involved in the policy-making process said powerful voices within government were pushing for the yuan to go still lower, suggesting pressure for an overall devaluation of almost 10 percent.

Data on Wednesday underlined sluggish growth in the world's second-largest economy. Factory output growth slipped to 6 percent in July from a year earlier, missing market forecasts, while fixed asset investment and retail sales were also lower than expected.

There was also a jump in fiscal expenditure of 24.1 percent in July, which reflects Beijing's efforts to stimulate economic activity.

PLAYING TO THE IMF?

The International Monetary Fund said China's move to make the yuan more responsive to market forces appeared to be a welcome step and that Beijing should aim for an effectively floating exchange rate within two to three years.

Beijing has been lobbying the IMF to include the yuan in its basket of reserve currencies known as Special Drawing Rights, which it uses to lend to sovereign borrowers, a major step in terms of international use of the yuan.

"Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets," an IMF spokesperson said.

The devaluation was decried by U.S. lawmakers from both parties on Tuesday as a grab for an unfair export advantage and could set the stage for testy talks when Chinese President Xi Jinping visits Washington next month, given acrimony over issues ranging from cybersecurity to Beijing's territorial ambitions.

However, William Dudley, head of the New York Federal Reserve, said an adjustment to the yuan was probably appropriate if the Chinese economy was weaker than the authorities had expected.

Growth in China has slowed markedly this year and will hit a 25-year low even if it meets its official 7 percent target.

Some economists believe China's economy is already growing only half as fast as official data shows, or even less.
..................................................

View the complete article, including images, at:

http://www.reuters.com/article/2015/...0QG04U20150812

**bsteadman** · 08-13-2015, 03:02 AM

China cannot risk the global chaos of currency devaluation

China has nothing to gain from triggering a deflation shock. Its economy is recovering as stimulus builds, creating 1.2m jobs a month

The Telegraph
Ambrose Evans-Pritchard
8/12/2015

Excerpt:

If China really is trying to drive down its currency in any meaningful way to gain trade advantage, the world faces an extremely dangerous moment.

Such desperate behaviour would send a deflationary shock through a global economy already reeling from near recession earlier this year, and would risk a repeat of East Asia's currency crisis in 1998 on a larger planetary scale.

China's fixed investment reached $5 trillion last year, matching the whole of Europe and North America combined. This is the root cause of chronic overcapacity worldwide, from shipping, to steel, chemicals and solar panels.

A Chinese devaluation would export yet more of this excess supply to the rest of us. It is one thing to do this when global trade is expanding: it amounts to beggar-thy-neighbour currency warfare to do so in a zero-sum world with no growth at all in shipping volumes this year.

It is little wonder that the first whiff of this mercantilist threat has set off an August storm, ripping through global bourses. The Bloomberg commodity index has crashed to a 13-year low.

Europe and America have failed to build up adequate safety buffers against a fresh wave of imported deflation. Core prices are rising at a rate of barely 1pc on both sides of the Atlantic, a full six years into a mature economic cycle.

One dreads to think what would happen if we tip into a global downturn in these circumstances, with interest rates still at zero, quantitative easing played out, and aggregate debt levels 30 percentage points of GDP higher than in 2008.

"The world economy is sailing across the ocean without any lifeboats to use in case of emergency," said Stephen King from HSBC in a haunting report in May.

Whether or not Beijing sees matters in this light, it knows that the US Congress would react very badly to any sign of currency warfare by a country that racked up a record trade surplus of $137bn in second quarter, an annual pace above 5pc of GDP. Only deficit states can plausibly justify resorting to this game.

Senators Schumer, Casey, Grassley, and Graham have all lined up to accuse Beijing of currency manipulation, a term that implies retaliatory sanctions under US trade law.

Any political restraint that Congress might once have felt is being eroded fast by evidence of Chinese airstrips and artillery on disputed reefs in the South China Sea, just off the Philippines.

It is too early to know for sure whether China has in fact made a conscious decision to devalue. Bo Zhuang from Trusted Sources said there is a "tug-of-war" within the Communist Party.

All the central bank (PBOC) has done so far is to switch from a dollar peg to a managed float. This is a step closer towards a free market exchange, and has been welcomed by the US Treasury and the International Monetary Fund.

The immediate effect was a 1.84pc fall in the yuan against the dollar on Tuesday, breathlessly described as the biggest one-day move since 1994. The PBOC said it was a merely "one-off" technical adjustment.

If so, one might also assume that the PBOC would defend the new line at 6.32 to drive home the point. What is faintly alarming is that the central bank failed to do so, letting the currency slide a further 1.6pc on Wednesday before reacting.

The PBOC put out a soothing statement, insisting that "currently there is no basis for persistent depreciation" of the yuan and that the economy is in any case picking up. So take your pick: conspiracy or cock-up.

The proof will now be in the pudding. The PBOC has $3.65 trillion reserves to prevent any further devaluation for the time being. If it does not do so, we may legitimately suspect that the State Council is in charge and has opted for covert currency warfare.

Personally, I doubt that this is the start of a long slippery slide. The risks are too high. Chinese companies have borrowed huge sums in US dollars on off-shore markets to circumvent lending curbs at home, and these are typically the weakest firms shut off from China's banking system.

Hans Redeker from Morgan Stanley says short-term dollar liabilities reached $1.3 trillion earlier this year. "This is 9.5pc of Chinese GDP. When short-term foreign debt reaches this level in emerging markets it is a perfect indicator of coming stress. It is exactly what we saw in the Asian crisis in the 1990s," he said.

Devaluation would risk setting off serious capital flight, far beyond the sort of outflows seen so far - with estimates varying from $400bn to $800bn over the last five quarters.

This could spin out of control easily if markets suspect that Beijing is itself fanning the flames. While the PBOC could counter outflows by running down reserves - as it is already doing to a degree, at a pace of $15bn a month - such a policy entails automatic monetary tightening and might make matters worse.

The slowdown in China is not yet serious enough to justify such a risk. True, the trade-weighted exchange rate has soared 22pc since mid-2012, the result of being strapped to a rocketing dollar at the wrong moment. The yuan is up 60pc against the Japanese yen.

This loss of competitiveness has been painful - and is getting worse as the shrinking supply of migrant labour from the countryside pushes up wages - but it was not the chief cause of the crunch in the first half of the year.

The economy hit a brick wall because monetary and fiscal policy were too tight. The authorities failed to act as falling inflation pushed one-year borrowing costs in real terms from zero in 2011 to 5pc by the end of 2014.

They also failed to anticipate a “fiscal cliff” earlier this year as official revenue from land sales collapsed, and local governments were prohibited from bank borrowing -- understandably perhaps given debts of $5 trillion, on some estimates.

The calibrated deleveraging by premier Li Keqiang simply went too far. He has since reversed course. The local government bond market is finally off the ground, issuing $205bn of new debt between May and July. This is serious fiscal stimulus.

Nomura says monetary policy is now as loose as in the depths of the post-Lehman crisis. Its 'growth surprise index' for China touched bottom in May and is now signalling a “strong rebound”.

Capital Economics said bank loans jumped to 15.5pc in June, the fastest pace since 2012. "There are already signs that policy easing is gaining traction," it said.

It is worth remembering that the authorities are no longer targeting headline growth. Their lode star these days is employment, a far more relevant gauge for the survival of the Communist regime. On this score, there is no great drama. The economy generated 7.2m extra jobs in the first half half of 2015, well ahead of the 10m annual target.

Few dispute that China is in trouble. Credit has been stretched to the limit and beyond. The jump in debt from 120pc to 260pc of GDP in seven years is unprecedented in any major economy in modern times.

For sheer intensity of credit excess, it is twice the level of Japan's Nikkei bubble in the late 1980s, and I doubt that it will end any better. At least Japan was already rich when it let rip. China faces much the same demographic crisis before it crosses the development threshold.
.................................................. ...........

View the complete article, including images, at:

http://www.telegraph.co.uk/finance/e...valuation.html

Announcement

China Rattles Markets With Yuan Devaluation -- Bloomberg

China Rattles Markets With Yuan Devaluation -- Bloomberg

Comment

Comment

Comment

Comment

Comment