As you’re aware, some folks are talking about the yuan again.
And that’s because last week, in the wake of the Moody’s downgrade, the PBoC decided to put the onus back on the fix. That is, it looks like China is going to start using the fix to control the spot again as opposed to the system they’ve (supposedly) been using since the August, 2015 deval after which they would effectively control the spot (i.e. burn FX reserves) to dictate the next day’s fix. You can read more in these posts:
- “Between A Rock And A Hard Place” – China’s Latest Yuan Gambit
- Your “Unreal, Irrational, Herd Actions” Were Pissing China Off – But They “Fixed” It
So yeah, that’s “one small step” back from liberalizing the exchange rate, but happily for the Politburo, it’s “one giant leap” towards keeping capital flight from spiraling out of control because basically, they’re just going to decide where the yuan should be on days where your “irrational, unreal, herd actions” push things in the “wrong” direction.
Needless to say, that’s had the effect of causing folks to think twice about betting on any near-term weakness, which explains this:
And it also explains the following chart, which in technical terms shows USD/CNH 1-month 25 delta risk-reversals turning bearish for the first time in almost four years, but in simpler terms represents people saying “yeah, fuck this.”