Less than a month ago, and just days after the Yuan was finally inducted into the IMF's hall of reserve currency fame, the Chinese Foreign Exchange Trade System, a part of the PBOC, made it very clear that what was about to happen would not be pretty, when it announced - in a statement which clearly everyone ignored - that going forward it would index the relative strength of the CNY not to the USD but the a basket of currencies (against which the USD to which it is pegged has been soaring).
At the time we explained that "what this means is that for anyone who thought the Yuan devaluation is over, now that the currency is at the lowest level relative to the dollar since 2011, the reality is that the devaluation relative to everyone else is only just starting.
And, with the PBOC's warning that the "RMB is relatively a strong currency among the major international currencies" the real devaluation is, just as we warned four months ago, about to be unleashed. Expect at least a 15% reduction in Trade-Weighted terms in the coming weeks and months, especially if the Fed hikes.
One month later, it appears that not a single person heeded this warning, and now that the PBOC has unleashed a whopper of a devaluation round...
... precisely as we warned a month ago, everyone is panicking. So, more for comic relief than anything, here are Wall Street's reactions to last night's latest "shocking" PBOC devaluation, which nobody could have possibly seen coming.
Sean Callow, Sydney-based FX strategist at Westpac:
- Today’s fixing was a big surprise, and impression is that upside risks to USD/CNY have grown
- Allowing the yuan to trend lower against the dollar this year is consistent with the need to loosen domestic financial conditions to support growth
- PBOC may not tolerate widening CNY-CNH spread for long since it will encourage capital outflows
Tommy Xie, Singapore-based economist at OCBC:
- PBOC’s actions are conflicting: there was suspected intervention yesterday and sentiment stabilized, but it set such a low fixing today
- PBOC may be taking dollar demand into consideration: usually at the start of a new year, retailers’ and corporates’ foreign-exchange requirements are higher
- Central bank may be using the fixing to convey a message to the market that it doesn’t want the RMB index to be too strong
Zhou Hao, Singapore-based senior economist at Commerzbank:
- Lowered-than-expected yuan fixing today shows authorities will tolerate more weakness for the time being
- Will help loosen monetary conditions; still, risk of capital outflows could increase concurrently
- Increasing outflow pressures may rule out excessive drop in yuan
Liu Dongliang, Shenzhen-based senior analyst at China Merchants Bank:
- Yuan depreciation this week aims to stabilize the yuan index amid a stronger dollar environment
- Expects 5%-10% depreciation by end of the year, though this depends on the pace of PBOC’s intervention and health of macroeconomy
So to avoid any further surprise, here is a preview of what happens next: China continues to devalue, and does so aggressively. But don't believe us. Here is what Kyle Bass said over the weekend:
"Given our views on credit contraction in Asia, and in China in particular, let's say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there's one thing that is going to happen: China is going to have to dramatically devalue its currency."
His full thoughts here.