Ok, well the yuan plunged overnight.
And by plunged, I mean it fell the most against the dollar since the devaluation.
There are a number of things going on there and the first thing you should note is that the yuan was of course sitting near at its strongest levels against the dollar since the August 2015 deval. So this doesn’t come entirely out the blue.
The proximate cause today was probably this:
- CHINA JAN. TRADE BALANCE $20.34 BLN; EST. $54.65 BLN
Which was of course the direct result of the trade data which was pretty funny depending on what your definition of humor is:
CHINA JAN. IMPORTS RISE 36.9% Y/Y IN DOLLAR TERMS; EST. 10.6%
"Imports were up 8,700% Y/Y: NBS"
— Walter White (@heisenbergrpt) February 8, 2018
It’s of course possible that the data is being affected by the timing of the Chinese New Year holiday and it looks like a couple of people are trying to say the yuan decline wasn’t caused by that miss on the surplus number, but it was. There were contributing factors, but that was what really sparked it. Here’s the offshore yuan:
And here’s an annotated chart that shows you how things have played out for the yuan. Note the (successful) attempt to engineer a short squeeze last summer, the (initially) successful attempt to put the brakes on that by relaxing rules on forwards in September, and the (not so successful) effort to put the brakes on post-September yuan strength by sidelining the counter-cyclical adjustment factor that was used to start last summer’s short squeeze.
Also weighing on the currency on Thursday was the renewal of QDLP – basically, that means they’re not as jittery about capital flight these days, now that reserves are climbing and the yuan is strengthening. Here’s Reuters, who broke the story:
China has resumed an outbound investment scheme after a two-year hiatus, granting licenses to about a dozen global money managers, sources said.
Foreign fund managers with newly awarded quotas will be able to raise money in China for investment overseas under the Qualified Domestic Limited Partnership (QDLP) plan for the first time since late 2015.
The quota-based Shanghai scheme was unofficially suspended when China tightened capital controls amid turmoil in its stock and currency markets.
“There was pent-up demand for outbound investment,” Per Hammarlund, chief emerging markets strategist at SEB told Reuter for a separate piece, before cautioning that “it doesn’t seem to me that it will reverse the strength of the yuan this year – it’s a temporary dip. It’s just a reaction to the fact that there will be some money coming out of the country.”
Bloomberg also notes the following two possibly relevant bits:
- The foreign-exchange regulator said Wednesday that it sees “more noticeable” two-way moves in the yuan, which is managed by the central bank against a reference rate set each day
- A front-page commentary in China’s Economic Daily on Thursday said more fluctuations in the currency are likely
“It’s a combination of factors including a stronger dollar, the nervousness in the equity market and the heavy positioning accumulated earlier that’s caused the decline,” Bank of Singapore’s Sim Moh Siong told Bloomberg for the article linked above, adding that “the trade surplus and the news about resuming the QDLP could be a factor, but I’m not sure they’re the main driver.”
Whatever you want to say, this is something worth noting, especially as Chinese stocks fell again, as positioning was probably pretty one-sided and as China looks to fend off accusations of FX manipulation.