China Devalues Renminbi

Today’s Pfennigfor your thoughts…

Good day, and a tom terrific Tuesday to you!

Well, there was HUGE NEWS from Asia overnight, as the heading on the Pfennig tells you. And the rest of the currencies in Asia got whacked on the news, and the Pan-Asian currencies fared no better.

So, it was a real shocker to come in this morning and see all this blood in the streets. Of course there’s no real blood, that’s just a market expression that’s used to describe losses like these.

So, instead of talking about fun stuff to start the Pfennig this morning, I’ve chosen to go right smack dab into the Chinese decision to devalue the renminbi.

But first, let me remind everyone of what I said yesterday:

There is one thing about the exports number that scares me a bit.  And 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 (SDR’s), 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.

So, what’s going on here?

Well, the Peoples Bank of China (PBOC) came out with their fixing overnight and to the shock of the markets, it was 1.9% weaker than the previous fixing.

Wait, What? I thought the most the fixing could move was 0.3% each night. Ahhh, I see what this is, it is a one-off devaluation.

This is the biggest one day move since July 2005, when the Chinese dropped the peg to the dollar and revalued the currency upward by 2%… I would have to think that the Chinese are serious about dealing with their economic slowdown, eh?

So, what kind of damage do you think the Chinese have done to their goal of having the renminbi as a part of the IMF’s reserve currencies?

Well, as I said above, right now, it doesn’t look good for the China’s “exchange rate liberalization” that they’ve touted for a couple of years now.

But, in a couple of months, what will the markets think? This could all be water under the bridge by then, so we’ll have to wait-n-see, what becomes of this.

For now, though, the collateral damage to the rest of Asian and Pan-Asian currencies is not good. The Aussie dollar has lost nearly 1 full cent, the Singapore dollar got whacked, and all points in between these two have been sent to the woodshed.

I did see a story on the Bloomberg titled “China devaluation screams buy dollars.” Well, I don’t know if I would go to that extreme.

Exports from the U.S. have been just as bad as those from China, so who’s to say that the U.S. doesn’t do something to further weaken the dollar?

But as far as the trading partners of China that includes Australia, New Zealand, Singapore, the Eurozone, and the U.S. what will happen to their currencies would be the question of the day.

You see, China did this to make the renminbi weaker, and allow exports to go out the door at a cheaper level. But now, China’s trading partners will have to make moves in their currencies so that the offset currencies aren’t too strong and out of whack when compared to the renminbi. And the vicious circle goes around and around.

And let’s lose focus on the difference here between when they dropped the peg to the dollar in July 2005 and the renminbi was 8.5 and today after the devaluation it is 6.2298.

The currency still remains very strong vs. where it was when it dropped its peg to the dollar!

Longtime readers might recall that used to follow and read tons of stuff what economist, Stephen Roach talked about. He made sense most of the time, and then sometime around the Financial Meltdown, he disappeared, and I no longer could find his stuff.

Well, Mr. Roach had something to say about the devaluation of the renminbi, and it plays nicely in the sandbox with what I just wrote, so let’s listen in.

That raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous.

But let’s not lose focus on who started this currency war: the U.S. And given the rot on the vine of the Trade Deficit, and the drop in exports, one has to think that it won’t be long before the U.S. gets back into the “destabilizing skirmish” that Stephen Roach talks about.

And my conspiracy blood is boiling this morning. I know, I know, I’m not supposed to talk about conspiracies any longer, I have to throw this one out there for it appears too obvious to me.

So, it was quite curious two weeks ago when the IMF decided to delay the decision on adding the renminbi to their Reserve Currency roster. Everyone was confused by the timing of the decision, as it wasn’t supposed to come until October.

So, it appears to me, that the IMF got the wink and nod from the Chinese government that this was up their sleeve. Imagine the egg on the face of the IMF if they were all prepared to add the renminbi, and then the Chinese announce a devaluation?

So, chew on that for a while, and see what you think.

There is one thing about this move though that intrigues me.  For months now the PBOC held a tight grip on the renminbi’s value, and kept it in a range, that would keep the outflow of funds from China to remain at an acceptable level.

But, this devaluation quacks like a government move, it quacks like the government has taken over the fixing from the PBOC, and if it quacks like those two, then maybe it is what it quacks like.

In other words, I’m questioning whether or not the fixing has come to an unceremonious end?

In the end, the Chinese can show the IMF that while they did move to devalue the currency, they moved toward a floating currency.  It’s all there before our eyes folks, we just need to open them to see this going on.

The Chinese announcement brought more money to U.S. Treasuries and the 10-year yield dropped further, and gold became important in the one fell swoop.

I wonder if that guy that called gold a “pet rock” was watching last night as investors ran to the safe haven of gold…

I received two emails on the same subject from two different sources last night. One was from Seeking Alpha and the other was from the GATA folks.

Both emails highlighted the news that on August 6, 2015, Goldman Sachs and HSBC too delivery of a sum total of 7.1 Tonnes of physical gold.

Let’s hear how Avery Goodman who reported this news, had to say about this.

No, I have not made any typographical errors. And no, I am not talking about electric paper claims. I am talking about shiny yellow metal stuff that you can touch and feel.

The gold bars were not purchased for clients. They were purchased for the banks themselves. In spite of the antics in the paper-gold market, we know the physical market is on fire.

Demand will exceed known supplies by at least 1,350 tons in 2015.

Pretty interesting isn’t it? I mean to think about this takes some real thought.

I say that because wasn’t it Goldman Sachs who told their clients to sell their gold this year? And now they take delivery for their own position of 3.2 tonnes of physical gold. Hmmm…

Yesterday, morning, I talked about how the euro was working toward moving back from a negative to a flat position for the day. Well, it didn’t take much longer in time to achieve a flat position, and then the euro moved higher on the day, and even moved past the 1.10 handle.

And this morning, a stronger than expected Current Situation survey as measured by the think tank ZEW. But the ZEW survey on expectations took a hit. So, one step forward, and one step back, but for the most part, the euro is receiving some love on the safe haven flows to the larger currencies out of China.

So, all-in-all for the currencies today, it’s an ugly day. In fact the currencies have been hit not by just the ugly tree but by the whole forest today. UGH!

The euro, pound sterling, Swedish krona, Polish zloty, Hungarian forint and Czech koruna  are the only currencies with gains this morning.

The Swiss franc is flat as a pancake (think Head East), and even with all the rot on the currencies vine, the Dollar Index is weaker.

This is where you have a flashback and think. Oooooh, Mr. Kotter, Oooooh, Mr. Kotter, I know this one. You told us this a long time ago! It’s because the Dollar Index is heavily weighted with euros.  Right, Horshack!

The U.S. Data Cupboard is still yielding data prints that no one cares about today, but tomorrow we’ll see the July Retail Sales print.

I already told you yesterday what the BHI was indicating to me that we could see a rebound in Retail Sales. But that’s for tomorrow.tomorrow, it’s only a day away.

Well, once again this morning, I went to a couple of sources for stories, Zerohedge.com and Ed Steer. and once again, Ed Steer highlighted a story I saw on Zerohedge.com, so thinking that since Ed highlighted it, I should too:

One of the biggest drivers of the so-called recovery (in addition to the Fed’s $4.5 trillion balance sheet levitating to S&P500 and the offshore bank accounts of 1% of the US population) has been the US consumer: that tireless spending horse who through thick, thin, recession and depression is expected to take his entire paycheck, and then some tacking on a few extra dollars of debt, and spend it on worthless trinkets.

Sure enough, for the past 8 years, said consumer has done just that and with the help of the endless hopium and Kool-Aid dispensed by the administration, and by the political and financial propaganda media, spent, spent and then spent some more hoping that ‘this time it will be different.’

This all came to a screeching halt earlier today when courtesy of the latest New York Fed Survey of Consumer Expectations, we learned that the US consumer has finally tapped out.

Households reported that they expected to increase their spending by just 3.5% in the next year, a major drop from the 4.3% the month before. This was the lowest reading in series history.

Worse, when adjusting for household inflation expectations, which have been relatively flat if modestly declining around 3%, real spending intentions, when adjusted for inflation, just crashed to a barely positive 0.5%, down over 60% from the prior month. This too was the lowest print in series history.

Chuck again. WOW! Let me repeat this for you. Consumer spending expectations has reached  “a low for the series history” and the Fed is getting ready to hike rates? Are you kidding me?

I was reading the 5 Minute Forecast yesterday, and they received an email that took James Rickards to task for his call that the Fed won’t hike rates in 2015 (same as me you know), and asked what he would do when the Fed did hike rates.

Well, he’ll be like me, and admit he was wrong, but when the Fed doesn’t hike rates, where will this reader be?

That’s it for today. I hope you have a tom terrific Tuesday!

Regards,

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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