“There are no good options”.
The point: Beijing is already predisposed to intervening in markets to offset any turmoil a sovereign downgrade might catalyze and you can bet that predisposition is stronger than ever ahead of the Party Congress.
I’m not sure it will ultimately be enough to get the job done, all things considered, but the PBoC’s decision to effectively remove a barrier to speculation against the yuan (that’s a crude way to describe it, but it gets the point across) by cutting a reserve requirement put in place in the days following the devaluation in 2015 seems to have succeeded in putting the brakes on the rally – if only for a day.
Ok, get ready.
For now, the fiscal-chaos-can has been kicked, Harvey is behind us, and North Korea’s latest nuclear test has come and gone.
But dead ahead isÂ Irma’s landfall in Florida, North Korea’s “founding day” (which by most accounts will be “celebrated” with an ICBM launch), and of course, more gridlock in D.C. We are, figuratively and literally, in the eye of the storm on Friday.
Dear lord: the pressure on the dollar is unrelenting.
It looks like no one wants to be the idiot that’s long USD headed into a weekend that could see a catastrophic hurricane strike on Florida and another ICBM launch for North Korea.Â
“The extremely bearish USD sentiment spilled over to theÂ yuanÂ market, and fixing failed to cool down bullish sentiment,” Ken Cheung, a senior currency strategist at Mizuho Bank in Hong Kong notes, adding that “heading to the weekend, risk-off sentiment due to the foundation day of North Korea also raised safe-haven demand for theÂ yuan.”
We still maintain that it’s just a matter of time before one of these fixings comes in much, much weaker than expected. That’s not to say the medium-term trend won’t be a stronger yuan and it’s certainly not to suggest that the PBoC is eager to upset any apple carts ahead of the Party Congress next month. It’s just to say that if there’s anything the PBoC hates, it’s the idea that market participants think the currency is a one way trade. And this is becoming a one-way trade.
As we’ve said repeatedly, with Chinese equities riding a hot streak, with capital flight seemingly under control, and with a rapidly appreciating yuan bound to weigh on the economy eventually, don’t be surprised if the PBoC takes the opportunity to push back – at least a little bit.Â
Meanwhile, you already know the story with the offshore yuan. And that story hasn’t changed. In fact, the offshore yuan rose against the dollar for a 14th consecutive session on Monday – that’s the longest streak on record.
“Though considered a tail risk, a military confrontation on the Korean peninsula could see Asian currencies falling 5% to 10% and the regionâ€™s equities plunging 20%,”Â UBSÂ Wealth Management Global CIO Mark Haefele and head of Asia Pacific investment Min Lan Tan write in a new note.