Boy, Did Those Chinamen Ambush the Currency Market!

If only we were “Kenny’s” fare again, we could get the inside scoop…

“Chinese Devalue Yuan in Shocking Move,” reports CNNMoney this morning. “The People’s Bank of China allowed the yuan to depreciate by nearly 2% against the U.S. dollar on Tuesday, the result of a surprise policy change that roiled international currency markets.”

REC_08-11-15_Yuan1

At writing, gold and crude oil are getting backhanded — down around 3%. Stocks are feeling the hurt in the U.S., Europe and Asia, too.

As such, CHAD, the Direxion Daily CSI 300 China A Share Bear 1x Shares we put to you yesterday, is sitting pretty — up almost 4% this morning. There are more gains to be had there too, if our analysis is correct.

For background, the yuan’s peg to the dollar had been in place since 2006. The People’s Bank of China, their central bank, would buy or sell yuan to keep the currency near a certain value against the dollar. The dollar’s been strong since 2011. Ergo, the peg had made the yuan strong too.

To understand why that peg was nixed — and what it means for your money — we redraw your attention to the map from yesterday’s reckoning. It shows each country’s greatest source of imports, or which nation exports the most:

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Economics textbooks claim a stronger currency = lower exports. And lower exports = lower GDP. Currency wars, what hoity-toity types call “competitive currency devaluation,” are a race between countries to have their flag cover as much of this map as possible.

For China’s part, exports made a third of their GDP last year, as you might guess looking above.

Last month, however, their export number dropped 8.3%. In addition, their stock market is down 30% from its peak. The fissures are broadening.  By breaking the peg they hope to reverse that trend. In our estimation, they’re one month too late.

Giving credit where it’s due, Chuck Butler, who writes the Daily Pfennig for EverBank, thought aloud about these very problems yesterday:

“There is one thing about the exports number that scares me a bit. That is, what if China decides to do what everyone else in the world has done to their currencies, debasing them, depreciating them and whacking them until there is no more to whack, just to improve their exports?

“I’ve talked about this before and always reasoned that as long as China was working toward getting the renminbi to be part of the IMF’s reserve currencies that they use for the special drawing rights (SDRs) that China would not put that work to risk by depreciating their currency…  

“But now we’ve been told by the IMF that they will revisit their decision a year from now. What would it hurt if the Chinese decided to adjust the renminbi’s value downward now? Think about that. It would much like forgetting about the pain, and a year from now, the IMF would have forgotten about what the Chinese did.”

“If the yuan is sliding, then why not join in?” Sean Callow, a currency strategist at Australia’s Westpac, told CNBC this morning. “If China’s a rival exporter, and all of a sudden it’s allowing its currency to weaken, then you’re more inclined to let your currency weaken.” Thus, Singapore, New Zealand, Australia and South Korea have all dropped against the dollar today along with the yuan.

But “any macro benefits must be weighed against costs,” cautioned a Financial Times report. “These mainly fall on those domestic companies and banks that have dollar-denominated debt and face the prospect of paying them back via a weakening renminbi” or rand, kiwi, Aussie dollar or won. In our previous reckonings, we’ve outlined the $9 trillion in emerging-market dollar-denominated debt. It’s a ticking time bomb. And as this strong dollar dynamic continues, you can expect more debt defaults from foreign corporations.

“Among the broader market implications,” adds FT, “looms further downward pressure on commodity prices and on blue chip equities in the developed world, as multinational companies face the prospect of slowing demand from China and a firmer US dollar.”

Each wild gyration offers you a unique opportunity to safely make big, fast gains, if you know where to invest. “Currency wars,” summarized colleague Jim Rickards after reading the headlines, “is the gift that keeps on giving.”

Now, King Dollar stands as the world’s lone strong currency… and Janet Yellen stands to eat her words. Look for no rate increase in September and maybe even another round of QE next year.

Click here for Jim’s analysis, which explains why…

Cheers,

Peter Coyne
for The Daily Reckoning

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