Chinese currency pegged to USD

[Timmy]

Who wants to bet we come back in a year to find the USDCNY ~100% up from Mondays price?

Monday's fix was at 6.8275 (from the link provided by satanoperca, above)
http://www.theaustralian.com.au/bus...urprises-markets/story-e6frg90x-1225882329000
A 100% appreciation of the USD against the CNY would put the rate at 13.655 Yuan to the USD. Are you really expecting that over the next 12 months sinner?

 

[Trembling Hand]

Play for the next hour seems clear. they adjust up again we go green. No adjustment watch out bellow.

Stay turned.....

 

[skc]

Monday's fix was at 6.8275 (from the link provided by satanoperca, above)
http://www.theaustralian.com.au/bus...urprises-markets/story-e6frg90x-1225882329000
A 100% appreciation of the USD against the CNY would put the rate at 13.655 Yuan to the USD. Are you really expecting that over the next 12 months sinner?

Don't you mean the other way? i.e. ~RMB 3.5-4 to 1 USD...

Something on top of the Chinese minds is that the Japs let the Yen appreciate too much and it killed their economy for 25 years and counting... so I would bet against 100% rise in 12 months... May be 15% in my books...

 

[Trembling Hand]

Who wants to bet we come back in a year to find the USDCNY ~100% up from Mondays price?

So if you are looking for a fall then you will take the bet that in 1 year its 100% lower

 

[sinner]

Err what? You guys are so confusing.

How hard is it to understand? All I stated was that Mish is of the opinion that if the CNY was to freely float it would not go up (as all those claiming it to be undervalued would assume) but rather it would go down.

That means, USD goes up relative to CNY.

The PBoC has provided a mechanism for the price to essentially straightline 130% a year by allowing it to move a max of 2.5% per week. This isn't exactly a free float, but if market forces are strong enough (they are certainly pent up enough in the CNY futures) we could easily see a yearlong trend in the CNY.

If you are like my macroeconomic father (who btw, refused to buy gold at 680USD/troz) then you would be betting USDCNY to go down as you believe the CNY is undervalued. Contrarians who wish to bet against Timothy Geithner, my father and a bunch of US Congresscritters would be betting USDCNY to go up as you believe the CNY is overvalued.

There is a macro trade in this mess somewhere, probably using DAX, NASDAQ-100, USDJPY and USDCNY but I am still trying to think it through.

 

[Timmy]

Who wants to bet we come back in a year to find the USDCNY ~100% up from Mondays price?

Sinner, you seriously expecting the USD to appreciate by 100% against the CNY within the next year?

A 100% appreciation of the USD against the CNY would put the rate at 13.655 Yuan to the USD.

 

[Trembling Hand]

Err what? You guys are so confusing.

How hard is it to understand?

WTF?? Have you blown up your account sinner? You're getting more and more delusional by the post. We get the play. What we don't think is very smart is the 100% move is the only outcome for CNY bulls.

carry on,

 

[sinner]

Sinner, you seriously expecting the USD to appreciate by 100% against the CNY within the next year?

A 100% appreciation of the USD against the CNY would put the rate at 13.655 Yuan to the USD.

Why not?

Have you run the numbers for Chinese banks, money supply, balance sheets, liabilities, lending rates etc? What is so great about the CNY that would stop macro traders selling it in return for USD after performing such due diligence? Do the Chinese Government and PBoC want a stronger CNY? What would happen to the value of Chinas huge foreign currency reserves in a CNY appreciation? Do any of the reasons touted for an upward revaluation in the CNY make sense to the market?

For 2009 (Jan-Jan) the M2 increase registered by the PBoC was approx 22%. For 2009 (Jan-Jan) the M2 increase registered by the US Fed was approx 3-5%.

2009 being the latest money supply data available on the pbc.gov.cn website. If you look at 2010 M2 data from the fed you can see it has barely moved an inch.

Anyone can go look and compare bank credit, loans/liabilities, lending etc between the US and China. In fact you would think anyone putting down my thoughts here in the way that has occurred today would have already done so.

Worth pointing out though, that I never said we would go in a 100% straightline from A to B, I simply noted that the possibility exists now whereas last week it did not, gave two opposing viewpoints on the issue and picked which one I feel is most valid. I gave my opinion, the difference between trolling and a discussion is where you provide your thoughts and viewpoint rather than what has transpired in the last page. Trust me, I won't cry if you have the opposite viewpoint.

WTF?? Have you blown up your account sinner? You're getting more and more delusional by the post. We get the play. What we don't think is very smart is the 100% move is the only outcome for CNY bulls.

Delusional? Which delusions are you speaking of now? You said "if you are looking for a fall then you bet in 1 year it's 100% lower" and skc quoted 3-4CNY/1USD and now you're speaking of CNY bulls it confuses me what you all mean.

I've previously stated to you that I sometimes have trouble understanding your statements and requested that you be understanding in this regard with helpful clarification and civility. Instead you denigrate. Not the first time you have behaved in this way even though your views are treated with respect even in disagreements.

My account is FINE thankyou very much for asking. In fact I am just about finished preparing my paperwork for the tax man visit next week. I am still waiting for your reply in the tick volume thread by the way where you said that large range bars always have a higher tick volume than low range bars. Also a reply for your claim in the gold thread that futures never represent the underlying in any market would be nice. Because, you know, sort of getting sick of trying to have discussions which you keep derailing with your all-or-nothing statements never to be covered again.

 

[Trembling Hand]

Oh god here we go!!

Delusional? Which delusions are you speaking of now? You said "if you are looking for a fall then you bet in 1 year it's 100% lower" and skc quoted 3-4CNY/1USD and now you're speaking of CNY bulls it confuses me what you all mean.

My point is your 100% bet is just dumb. You're trying to shoe horn everyone into a binary bet. As skc pointed out 15% moves in currency is significant enough.

I am still waiting for your reply in the tick volume thread by the way where you said that large range bars always have a higher tick volume than low range bars.

OMG!! how long have you been carring that pain for mate?? I still stand by all I said. Therefore you must either be wrong : or have been on a search to find a marginal example. FULLSTOP.

Also a reply for your claim in the gold thread that futures never represent the underlying in any market would be nice.

WTF!!! Since you seem to have a chip on your shoulder mate let me try and help ya. The only thing I can imagine that you are talking about is my comment that open interest doesn't match physical in futures. If that's it and you think it does well then find the post and we will have a great discussion about it.

 

[Timmy]

Worth pointing out though, that I never said we would go in a 100% straightline from A to B, I simply noted that the possibility exists now

Well, anything is possible. I could get to root Miranda Kerr (I have taken a close look at her assets) some time in the next year, that is possible too. Not bluddy likely though.

Who wants to bet we come back in a year to find the USDCNY ~100% up from Mondays price?

So, OK, yeah I will take that bet. I say, no way. Happy to keep it friendly at $10 ... but if you are serious I can go up from there?

 

[sinner]

Oh god here we go!!

My point is your 100% bet is just dumb. You're trying to shoe horn everyone into a binary bet. As skc pointed out 15% moves in currency is significant enough.

I am not trying to shoe horn anyone into anything. How exactly did you get that idea from my posts? Why would I possibly care what you think other than as a topic of discussion which interests me?

OMG!! how long have you been carring that pain for mate?? I still stand by all I said. Therefore you must either be wrong : or have been on a search to find a marginal example. FULLSTOP.

Err sorry, not wrong. I actually posted intraday examples which show your claim to be simply incorrect using two retail brokers on the day you made your claim and can show similar examples any trading day of the week. So, no not wrong. If you still stand by what you said, which was "using tick vol, high range bars will always show as higher vol and low range bars as lower vol" you should be able to explain away my examples in 2 seconds. Generally speaking on the internet, when you make a claim and refuse to discuss it that is called trolling.

WTF!!! Since you seem to have a chip on your shoulder mate let me try and help ya. The only thing I can imagine that you are talking about is my comment that open interest doesn't match physical in futures. If that's it and you think it does well then find the post and we will have a great discussion about it.

Actually here is your quote word for word:

Explode how many more time does it have to be rammed down the gold bugs dumb brains that futures contract traded NEVER = physical in ANY market.

I raised the counter-example of JP Morgans contango trade on Crude, to which you never replied. In that case, futures contract traded certainly does equal physical. I doubt JP Morgan hired a bunch of supertankers to store their futures contracts.

Maybe these cases seem like marginal examples or chips on the shoulder to you but to me they just seem like more examples of your attitude towards others on this forum.

To keep it on topic:

The Chinese didn't have to pick a trading band. They could have picked a one-off or near one-off revaluation. Instead they chose a mechanism which will allow the CNY to move 130% a year. Why?

When it comes to forex trading, IMHO, monetary aggregates do not lie. If anyone thought the Fed was bad, they need to look at the practices of the PBoC.

So, OK, yeah I will take that bet. I say, no way. Happy to keep it friendly at $10 ... but if you are serious I can go up from there?

How about if I'm right you owe me 1USD otherwise I owe you 6.8CNY

 

[Trembling Hand]

I raised the counter-example of JP Morgans contango trade on Crude, to which you never replied. In that case, futures contract traded certainly does equal physical. I doubt JP Morgan hired a bunch of supertankers to store their futures contracts.

Maybe these cases seem like marginal examples or chips on the shoulder to you but to me they just seem like more examples of your attitude towards others on this forum.

Oh Fine Sinner. I just bought 10 SPI contracts can you do a ring around to all the ASX 200 companies and tell them to issue 1 mil extra in shares as I just increased to the OI. But wait last night the Open interest decreased by 400 mil so at the same time get them to cancel 400 mil worth of issued shares. Then call NCM and get them to put a few 100 oz of gold back into the ground as I closed out another trade.

Just lol you are ridiculous. Not worth the time.

 

[sinner]

Yuan overvaluation? Am I the only one singing this tune? Surely not. Mish has been calling the CNY worthless longer than many if any. The strong numbers out of China in the last 30 days has pushed the concept of CNY devaluation to the background.

But right before that, it was an idea gaining support:
http://ftalphaville.ft.com/blog/2010/03/25/187316/devaluing-the-yuan/

China was running deficits, for the first time since early 2004. SocGens Albert Edwards has been talking this line for some time now, and rightfully so IMHO. You can click the link for analysis and thoughts. Was last months Chinese data an anomaly in a new deficit trend or were deficits the anomaly in the longer running surplus trend?

Some academics were even pointing out the incorrect nature of the "undervalued CNY" claim spouted by US and Canadian politicians in the early 2000s and as the political call heated up in 2007:
http://www.asianresearch.org/articles/1737.html
http://tr.tulips.tsukuba.ac.jp/dspace/bitstream/2241/91137/1/JIMF_26-5.pdf

Economists in China agreed very recently:
http://www.reuters.com/article/idUSTRE65G0C520100617
Hell, I even remember Goldman posted advice earlier in the year that claimed the BRIC currencies were overvalued using some long term productivity model.

 

[MRC & Co]

Sinner, the problem with all these articles, is they don't account for stockpiles, only current flows.

The US is trying to reverse decades worth of deficits, not simply a few months here or there.

Then one article (the guy from SocGen) talks about moving the flows from the capital account and onto the trade balance by instead stockpiling resources (something no doubt congress has taken into consideration).

G20 is sure to be fireworks with all the financial regulatory mess and China/US rhetoric! Geithner and Obama will probably be happy with the Chinese measures to date, but I highly doubt lawmakers will be! Obama can of course veto any bill, but a lot will also depend how the American public take the news.......

 

[sinner]

Sinner, the problem with all these articles, is they don't account for stockpiles, only current flows.

Hi MRC,

I disagree with your statement because the academic papers deal with the long term data and picture in mind. What do you mean by stockpiles? As in, stockpiles of US debt? Isn't it safe to say that if USDCNY goes down significantly, China will be buying proportionally less Treasuries at each auction and in fact become net sellers of US debt?

If someone owes you $20,000 they are in trouble. If someone owes you $2trillion you are the one who is in trouble. That is to say, I do not believe China will be buying any less US govt debt than it is now without significant repercussions to their current holdings. That and the huge fact that they don't want to buy less or none, they want to buy more!.

Confirmation of this theory comes in the form of Chinas most recent disclosure of US debt holdings:
http://www.bloomberg.com/news/2010-...asury-securities-rising-3-to-900-billion.html

“If history’s any guide they will keep buying,” Nomura’s Goncalves said. “Global imbalances don’t turn on a dime. We don’t know how robust this recovery is. There are only so many places China can put its money.”

The pandas have fallen headlong into the long end of the curve to keep US rates low. They almost had a hernia when the Fed monetised $300b in debt as the "buyer of last resort". Does this look like a country to you that is looking for a more expensive local currency?

The US is trying to reverse decades worth of deficits, not simply a few months here or there.

Sure they have a trade deficit (of their own making), but USD going down in relation to CNY is more likely to shift productive capacity to a cheaper 3rd currency or basket of currencies - not reinvigorate the US manufacturing and production sectors which have been gutted for LIFE thanks to the Unions. It is safe to say that Congress is aware of this, not that:

“If we don’t boost our national savings rate, with trillion dollar deficits as far as the eye can see, the Chinese piece of our multilateral trade deficit just goes somewhere else,” Roach said. “It goes to a higher-cost producer and that taxes the American people.”

(from the above Bloomberg article)

In fact, if you look at the manufacturing numbers and predictions for the last 2 years, the US was supposed to lose its place as #1 manufacturing output (not per capita) in the world last year. What has actually happened is that since April '08 the USD has been cyclically strong (even in '09 it didn't go below 75 on the DX) and US manufacturing became more resilient during this period!

It's also worth pointing out the Chinese have all sorts of well-papered-over budget deficits of their own, through local government enterprises, state owned corporations, banks who lend on command of the PBoC, etc.

Then one article (the guy from SocGen) talks about moving the flows from the capital account and onto the trade balance by instead stockpiling resources (something no doubt congress has taken into consideration).

Actually his point is (and it is very valid) that China does not have to buy US Treasuries. It just so happens to be a market liquid enough to take their bid.

“I don’t think it’s really in China’s economic interest to distance itself from its economic ties with the U.S.,” said Carl Lantz, head of interest-rate strategy in New York at primary dealer Credit Suisse Group AG. “We borrow pretty cheaply from them, we buy their goods. Our country, despite some of the turmoil, still offers deep and liquid capital markets.”

China has to buy something with those USD but as long as the asset is priced in USD the purchase can be whatever from AUDUSD contracts, spot gold, copper, etc to retain the same monetary effect. The Chinese carry out diversification of their USD into spot FX markets almost daily. Usually into anything that can hold the bid for a few hours. I am sure the pickup in commodity stockpiling recently is all to do with less Euros, Pounds and Francs being bought by PBoC.

Nonetheless, I have procured an article for you which discusses not just current flows but also historical trends. It is written by the well known China bear, Andy Xie:
http://english.caing.com/2010-04-12/100134074.html
It is a long article, but a good read.

 

[MRC & Co]

Hey Sinner,

Don't have time to generate a proper response (nor read and grasp all the information in this thread) at the moment, but will get back to it at a later date (hopefully before G20 and what should be crunch time).

That being said, one thing is certain, if USD/CNY does actually appreciate, there is going to be a guaranteed trade war (whereby 'double dip' may begin to be talked about as 'lower low').

On another note, Soros talks on the Eurozone crisis at a University in Germany tonight I believe, should be an interesting speed to read in the morning.......

All the best with the trades everyone.

 

[sinner]

http://israelfinancialexpert.blogspot.com/2010/06/end-of-yuan-peg-china-is-desperately.html

With everyone focused on the dead and buried Spanish interbank market (no, no STD is the healthiest bank in the world, for realz) is the real liquidity threat elsewhere... about half a world away to be precise? Since June, the Chinese 1 Month Repo Rate has exploded and is not looking back. After trading in the 1.5% area for years, in the past 3 weeks, this has nearly tripled, and today traded at a 52-week (and close to all time) high of 3.8%. While for many Chinese banks, flush to the gills with money due to a tapering in consumer lending, this is not an issue, we are fairly confident there are various banks that will be impaired by this spike. And it certainly did not occur in a vacuum - there a distinct, and extremely levered, correlation between the CNY fixing and the 30 Day Repo. Should China go ahead and reval the renminbi, must we expect a complete lock up of the Chinese lending market?

I saw an article on ZH about the repo rate, but there was no context. This article puts it to full light.

Even more bearish than I anticipated.

 

[MRC & Co]

Sinner, I've read through your posts (haven't had time to read all the articles) but they seem to jump from bit to bit without much connection (or at least I cannot connect it all ).

Can you explain for what reasons, USD/CNY will appreciate over the coming year? Just a simple paragraph which links the cause(s) and effect(s).

My understanding of this situation is not close enough and I have no reason to believe the USD/CNY will definately depreciate, just trying to grasp your take of why it should appreciate?

 

[sinner]

Can you explain for what reasons, USD/CNY will appreciate over the coming year? Just a simple paragraph which links the cause(s) and effect(s).

Hi MRC,

1. Monetary aggregates (specifically M2 in this case) show a huge expansion in the money supply for China and a proportional drop in the bucket when examining US money supply. To me, this is the big one. You can confirm by working out the comparative 2008 stimulus package by each government as a % of GDP. You will notice the Chinese package is roughly 3 times the size of the US package using this comparative measure.
2. Purchasing Power Parity Theory indicates the Yuan is overvalued.
3. Huge Chinese overcapacity in every single sector, especially the most leveraged ones and those now reliant on Chinese "LGE" or Local Government Enterprise.
4. Despite a steep incline in the EURCNY rate during 2009 due to the USDCNY peg the SSEC still underperformed the SPX as well as the broader market. This shows underlying weakness in the SSEC and Chinese economy as a whole.

5. China is well known for its trade surplus - but there is a much larger historical trend going on. This from HSBC:

March's trade deficit is likely to be temporary, but it reveals an underlying trend that the market has overlooked; that is, China's trade (and current account) surplus has already been falling at a rapid pace since 2007…China's trade surplus to GDP ratio had reached a historical peak of 7.5% in 2007, then it dropped to 6.5% in 2008 and further to only 4% in 2009. Meanwhile, China's current account surplus to GDP ratio had almost halved to 5.9% in 2009 from the spike of 10.6% in 2007. We expect this trend to continue with the trade surplus to GDP ratio falling below 3% and the current account surplus to below 4% by 2011. This is mainly because growth in China's imports is likely to continue to outperform exports growth in the coming years.

6. Despite attempts by the Chinese government to spur domestic demand, the Chinese still rely on export demand for their entire economy to function correctly. Europe being Chinas number 1 export economy now, closely followed by the US. I am having trouble seeing any possibility of Chinese export growth to Europe especially, but also the US. The official figures confirm this (COMI, BDI, etc). If you look at the US numbers you can see they are just regaining 2004 ground now.

China International Capital Corp. cut today its estimate for China’s economic growth this year to 9.5 percent from 10.5 percent, citing property tightening measures and overseas “uncertainties.”

Yuan gains would be “a disaster,” Song Zimin, an executive in the import and export department of apparel maker Shanghai Dragon Corp., said in an interview at China’s biggest trade fair in Guangzhou on May 3. “If the yuan rises 3 percent, where’s our profit? Many, many factories will close.”

and articles like this: http://www.ft.com/cms/s/0/cb5f1956-6d35-11df-921a-00144feab49a.html
7. The very concept of CNY appreciation is a political not monetary concept. Therefore it is extremely unlikely to be translated to the markets in any meaningful sense as the matter of what politicians want means nothing to the market at large. I will let a pro put it best:

…The saying that “undervalued yuan leads to global trade imbalance” cannot stand up to close scrutiny. Zhao Qingming, a researcher with China Construction Bank stressed that imbalance of an economy’s deposit and investment was the fundamental reason for trade surplus or deficit. Exchange rate has only minor influence.

High savings rates in China coupled with extremely low levels of investment (real estate being one of the few vehicles which Chinese savers can attempt a capital gain on) are the cause of surplus. The savings rate is not about to decrease significantly nor will the investment rate increase rapidly unless everyone is waiting to buy those new C300 futs. The US would do better to spur its own savings rate.
8. I believe we are fast approaching a trade war through protectionism, currency devaluation being the nuke. Mish has been covering the growing fight in articles like this one http://globaleconomicanalysis.blogspot.com/2010/02/china-announces-105-tariffs-on-chickens.html
(which thankfully covers many of his other articles on the same issue)
I think it is safe to say, this is a trend and it will not stop yet. Thus, competitive devaluation by the PBoC is possible. Especially if Geithner and Obama step on the Chinese hornets at G20.

9 and 10 are sort of iffy macro factors so I won't bother covering them but it is worth pointing out that if the CNY does indeed appreciate rather than crash through the floor then commodities are gonna go back up bigtime (if 2005 was any example to go by) and crude prices above $80/bbl will start exhibiting limiting factors on the economy again. I believe Andy Xie said something similar: "even a small appreciation could make a crisis inevitable".

 

[sinner]

http://online.wsj.com/article/BT-CO-20100623-714647.html

PBoC has flooded the market with 201 billion CNY this week to paper over holes in liquidity that keep tearing open again. That is roughly 30bio USD at the current rate. In a week.

The Chinese 30 day repo now sits 4.25% being just 1.75% a bit more than a month ago. This is fact after the above mentioned intervention. Take a look at the 7 day repo. Everything is fine with the CNY, expect the USDCNY to drop 15% in a year