After a week of jawboning markets into believing that the March FOMC meeting is now “live”, it appears China has decided to send a little message.
After weakening the fix by the most since Jan 9th, Chinese money market rates are soaring (1 week CNH HIBOR up 303bps) despite notable liquidity injections…
Of course an unexpected rate hike in March is an implicit tightening of the world’s financial conditions and thus liquidity withdrawal… reversing recent improvements in global dollar liquidity.
As Mark St.Cyr asks (and answers), is China about to begin pre-emptively devaluing the yuan?
Remember when any member of the Federal Reserve, regardless of the action be it a speech, interview, what they had for breakfast et cetera, was met with panting breaths by the financial media? You know, like it was back in the old days, say around 90 days ago more or less. My how time both flies and changes.
Today? Like it or not (and I presume they disdain it) the President as opposed to a Fed. president, has reclaimed all the oxygen, print, airwaves, bandwidth, and more from not only the general news, but the business/financial news as well. I have a feeling that’s not sitting well within the confines of the Eccles Building. Remember: Elites don’t like sharing stages, especially with those they deem as “outsiders.”
So what does the above have anything to do with March and the Yuan you may be asking? It’s this:
You or I may be enjoying a respite from the media where the Fed. (or central bankers in general) aren’t dominating every topic of business/financial discussion. Yet, the one audience I’ll contend that’s still hanging on every syllable for meaning and intent is China. And China is the, and I mean just that – the – only audience that matters. The reasoning is simple:
China, overnight, can bring the entire global markets crashing to its knees via one wrong move, exponentially faster than any Fed. misstep, intentional, or otherwise. Period.
In other words, the Fed. more often than not will signal first (yet they can surprise) and the move would cause turmoil, but the move (and resulting chaos) itself would be more reaction to surprise than substance, where knee-jerk-selling is met with horns-over-hooves buying from Bulls just itching to buy the next dip. (i.e., 1/4% unannounced or unanticipated hike or something else in kind.)
China on the other hand could intentionally devalue the Yuan in whole number, even double-digit percentages, unannounced overnight, and the chaos could quickly transform into unstoppable monetary bedlam. And there’s recent precedent for clues. e.g., August of 2015.
So with the above for context the question that should be first and foremost in everyone’s mind is this:
If China believes there’s a rate hike in March, regardless of what the rest of the world (and academia) might think. Will it force China into delivering a monetary strike first, and deal with its aftermath later, rather, than simply waiting around to then deal with any potential monetary aftermath or chaos unleashed by the Fed. later?
I believe not only will they move first – the move borders on inevitable.
I base this on no other reasoning than watching the Fed. continuing to throw ever-the-more fuel onto this “monetary powder keg” that brings that response on quicker, rather than later. For the more they pile on, the more this “monetary powder keg” moves from in-need-of-a-match, into self-igniting.
I am of the opinion China’s ever-growing capital flight problems, and more can not withstand another rate hike, let alone one so close after December. And the tell-tale signs for this to be more plausible than not have been occurring in plain sight with far more telling frequency (and I’ll imply: intent) than previously. And the ones who seem to not be reading the “tea leaves” is none other than the Fed. itself.
Here’s some of my reasoning from the article, “Feb’s FOMC Meeting: A Powder keg In Search Of A Match” To wit:
“If China feels that it is in a no-win situation (and it’s easily conceivable using the Fed’s latest words, speeches, shift in policy signaling and a whole lot more) They might decide after coming back from their New Year holiday and – act first – question later.”
Guess what the politburo did when they returned? Hint: Everything and anything but (and it’s a very big but) the one thing they always did in unison – defend the Yuan.
Everything in China went ballistic. Bonds, stocks, commodities, all up. The Yuan? Tumbled to one-month lows.
I’ll contend this is an overt signaling action which screams warning signs everywhere. For why did China, this time, throw so much money everywhere else except for the one place it basically threw the “kitchen sink” at only a month or so prior? (e.g., The Yuan as to strengthen it away from the much dreaded psychological USD/CNH 7.00 cross.)
Was this a test to see what reaction (both market and political) would take place doing something other than something solely Yuan centric? Or, was this a move of desperation as to subside further capital flight? After all: This is precisely the exact opposite of what one should/would do if the plan was to strengthen, rather than weaken one’s currency, correct?
Again: Why would you throw enormous sums of money into actions which not only have a negative effect, but a canceling effect on what you just threw (again) enormous sums of money only a month prior? Does the old joke “Drilling holes in the bottom of the boat to let the water coming in out.” come to mind here? Which is why I’m siding on the side of desperation – first, as opposed to a test. And here’s why, as stated by economist, and China watcher Andy Xie (one of the few economists I admire) to wit:
“China’s domestic woes and international challenges are largely due to its inefficient system. The government is obsessed with concentrating economic resources in its own hands, and asset markets are like casinos, sucking people in and making them lose money. The government uses its vast resources inefficiently. Hence, China’s currency has a tendency to depreciate.”
Using the above for a prism it’s easy to see how the politburo can do two things at the same time which seem diametrically opposed to what was professed (or signaled) only weeks prior. Why? Because when elites panic – they’ll throw money everywhere and anywhere first, because that’s all they know. And I believe this demonstrates China is beginning to panic.
The real question (and problem) now is: How far, and how fast, from the “beginning” to “end game” they decide to proceed going forward from here? I believe all we have to do is look to our own Fed. for clues, for they appear utterly clueless to what is taking place right before their own eyes.
So what kind of signaling (hence exacerbating China nervousness) is forthcoming from the Fed you ask? Fair question, to wit:
From Reuters™ “Dollar Index Rises As Yellen Signals More Rate Hikes”
“Waiting too long to remove accommodation would be unwise,” Yellen said in prepared remarks before the U.S. Senate Banking Committee, the first of her two-day testimony before Congress.
That was just a few days ago from Fed. chair Janet Yellen’s televised two-day testimony before Congress.
But what went along with the above was what went nearly unreported (as I implied when stating “the old days”) when none other than the Fed’s Dennis Lockhart (another Fed. president retiring at the end of the month) stated in an interview with Bloomberg™ “March meeting is live.”
That’s a lot of confirmation that March is to be considered live, is it not?
As I’ve iterated before, I believe the rest of the world (or “markets”) are still of the idea that the Fed. is once again “crying wolf” as they did all throughout 2016. For China? I think they’re back to an August 2015 frenzy caught between what to do next, never-mind, what not to do. And it’s getting more complicated for them by the day.
Think I’m over exaggerating? Fair point, so here’s just a few “other” headlines China returned from holiday to read and think about, let alone, needing a response to:
“…Trump Backs Japan Over Disputed East China Sea Islands”
Or how about this from the WSJ™ implying further retaliation, “U.S. Eyes New Tactic To Press China”
So where are we now? As I stated in my previous article, I believe it’s all about the Fed. minutes, to wit:
During that time I believe China will wait for the minutes to be released, and if it is made apparent that there was indeed further discussion as to bolster the inferences that the Fed. may be actively considering a path as to embark on a march towards higher rates, along with the thinning of its balance sheet, which would inevitably send the $Dollar rocketing skywards?
They’ll act first and ask (or maybe not) questions later. Sending everything that is now taken for granted in the “markets” (e.g., “It’s good to be long!) into total chaos. All before March 15th’s next meeting. Again, which just so happens to be the exact date originating the “Ides of March” warning.”
If the actions by China after returning from their holiday break are any clue? Than the possibility for a “monetary first strike” is all the more plausible, if not probable, than these “markets” are signaling, let alone contemplating.
China has thrown buckets of capital at not only the Yuan, but its credit markets in unison – and capital flight is accelerating still on all fronts. All while the $Dollar strengthens, and Yuan weakens seemingly against the will of both monetary bodies.
So again, with all the above for context, as I said in the title…
If March Is indeed “live?” Then so too is the mother of all monetary shocks.
We shall see our first clues for the minutes of the latest FOMC meeting are to be released this week. And if they are indeed “hawkish?” I believe it will force China’s hand before the next meeting. Whether anyone is prepared for it, or not.
And if any clues are to be extrapolated by current “market” action? The answer is self-evident: nobody thinks such a thing is possible anymore, let alone – positioned for it, making things more problematic than they already are. If that’s even possible.
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Finally we wonder if – just as was the case after the Shanghai Accord had fulfilled its Plunge Protection Team role in Q1 2016 – whether the same is about to occur…
Notice that the Yuan has been strengthening against the USD for the last 2 months (despite all the gnashing or political teeth over its manipulation). A Fed rate hike is the perfect excuse to let that pretense slide again.