PBoC: “Listen To Me Shorts, We’ve Got Your Head In A Vice”

As outlined in detail earlier this morning (here, here, and here) it’s a bad day to be short the yuan.

China has moved “very aggressively” to curb capital flight and serve notice to the market that this January will be different. So if you were in the “no-brainer” trade for 2017, then my condolences on one hell of a rough day.

I encourage you to read all about the overnight drama in the pieces linked above, but you can find a rundown of analyst chatter below courtesy of Bloomberg.

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  • Bank of Singapore (Sim Moh Siong, currency strategist)
    • CNH saw a “bear stampede” due to a position shakeup that was partially driven by a “self-reinforcing” pullback of dollar strength vs G10 currencies and yuan
    • It’s “painful to sit” on short yuan positions now, given the soaring CNH funding cost
    • Offshore yuan could extend rally to 6.75 per dollar in near term as there’s still a lot of short yuan positions under pressure to unwind
    • China has kept CFETS basket relatively stable since July and recent bias of stronger fixings suggest yuan depreciation may have been excessive; in medium-term, however, currency still faces downward pressure due to fundamental factors
  • Rabobank (Michael Every, head of financial markets research)
    • Capital controls aren’t working because that’s why they’re having to raise overnight deposit rate so aggressively; PBOC is still the guiding hand in CNH market, squeezing liquidity and forcing interest rates higher to “punish” anyone who’s borrowed CNH or shorted it
    • It’s an incredibly aggressive tactic, completely disruptive to day-to-day activities on CNH and completely opposite to any underlying effort to try to internationalize the currency or to put it forward as alternative to other currencies in the region for any day-to-day business
    • All of this is being done just to stop a few people shorting the currency to reflect the fact that everyone can see that capital is flowing out and that fundamentals argue for a weaker yuan
  • Bank of East Asia (Kenix Lai, FX analyst)
    • Given speed of yuan’s move, PBOC may have intervened to prop up exchange rate
    • PBOC is expressing its strong determination to keep currency stable and is seeking to restore confidence, as reset of citizens’ $50,000 quota of foreign-currency purchases and falling reserves weigh on sentiment
  • Mizuho Bank (Ken Cheung, Asian FX strategist)
    • Traders started unwinding long dollar and short yuan positions, and selloff doesn’t seem be related to intervention judging from flows
    • Some hedge funds, which have accumulated big short-yuan positions, can no longer bear the carry cost and losses
  • NAB (Christy Tan, head of markets strategy)
    • CNH rally came on the back of further short-covering, which in turn, pulled up CNY; offshore yuan’s movements are leading onshore yuan’s
    • It’s probably a reflection of “herd behavior” and of recent dollar weakness
    • Wide spread between offshore and onshore exchange rates may have added to strong pull for onshore yuan
  • Standard Chartered (Eddie Cheung, Asia FX strategist)
    • Removal of yuan liquidity has led to short squeeze in offshore interest rates; combined with higher fixings, this has caused market participants to pare back on positions that were looking for repeat of early 2016
  • Shanghai Commercial Bank (Ryan Lam, head of research)
    • Chinese banks in HK aren’t actively offering yuan liquidity in offshore market today; yuan liquidity is unlikely to improve due to increasing demand from traders seeking to unwind short positions, unless Chinese banks start to offer yuan
    • Chance for arbitrage is slim; Chinese banks have been checking cross-border flows very carefully lately and it’s very hard to move funds out without real trade- based documents; also, foreign banks in China have become conservative after the authorities checked some of them last year
  • China Everbright Bank (Ngan Kim Man, deputy head of treasury)
    • It’s very likely that Chinese authorities are withholding cash; these couple of days have been like a repeat of last January
    • There’s been a lot of attention on psychologically important level of 7, so China may want to maintain order around this time
    • It seems that China’s priority for now is preserving its foreign-exchange reserves; this is a stockpile to preserve its exchange-rate regime; if this drops too quickly, FX stability will be affected

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Or, summed up visually…

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3 thoughts on “PBoC: “Listen To Me Shorts, We’ve Got Your Head In A Vice”

  1. Joe Pesci got an affinity to playing baseball with his brother. They finally played their final game in a hole in Indiana, only this time they were the baseball.

    But China is REALLY SQUEEZING those that are shorting the Yuan—and long on the US dollar for now. Volatility is GREAT! It makes a great movie in itself. And we’re only in the first scene of the video. I can’t wait until we see the Europeans en mass, escape the EURO and buy tons of US dollars and give themselves a 90-cent EURO—while China tries to maintain the value of their own local FIAT vs. that SAME US dollar.

    That is, unless we are over-exaggerating the plight of the Italian Banks and its failing government. Maybe, Joe Pesci is also in that scene–he is Italian of sorts. It’s going to be a great Scene Number Two. ‘Roll em’.

  2. I like the ” PBOC may have intervened to prop-up the exchange rate” from the Bank of East Asia. This is going to get very interesting.

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