At the start of 2016, many financial pundits mocked Kyle Bass and a handful of other China skeptics for predicting that China's economic difficulties, and accelerating capital outflows, would translate into a continued devaluation for the Yuan. Less than a year later, with the Yuan plunging to all time lows, just shy of USDCNH 7.00, they were right.
It was just one year ago when the biggest worry for the market - which culminated with a near 10% S&P correction in in early 2016 - was the daily plunge in the Yuan driven by the surging dollar, which in turn prompted China to engage in an unprecedented reserve liquidation (in which it sold both government bonds and equities), leading to a daily selloff in risky assets on days when the Yuan was fixed lower.
We got an early hint of what the PBOC would do tonight on Friday and Saturday, when as we reported, an unprecedented volume burst of bitcoin buying out of China, sent the digital currency soaring to the highest level since 2014.
To be sure, we had expected sailing would not be smooth for the FX market, when on Friday afternoon, after Yellen's' unexpectedly hawkish comments at Harvard, which sent the USD surging, we predicted a stormy sea for the Monday Yuan fix:
CNY will be interesting on Sunday night
Now that all eyes have turned on China eager to find how it will react to a potential Fed rate hike in June or July, the question is whether the sharp Chinese devaluation unveiled overnight, which sent the Yuan to fresh 5 year lows, will be a one-off event, and whether the PBOC will intervene far more aggressively in the offshore CNY market to keep FX market turmoil to a minimum.
According to at least one person, the answer is no.
The single biggest event overnight was the PBOC's devaluation of the Yuan to the lowest since March 2011, setting the fixing at 6.5693, the highest in over 5 years and in direct response to a stronger dollar, which however if one looks at the DXY remains well below the recent highs in the 100 range, suggesting for China this is only just beginning.