Devaluations Halt: Renminbi Appreciates Overnight

Today’s Pfennigfor your thoughts…

Good day, and a happy Friday to one and all!

Well, the Chinese did stop the devaluations last night, and the renminbi actually ended up appreciating!

A couple of weeks ago, in a Sunday Pfennig, there were two Chinese currencies: a non-deliverable renminbi, which is the most commonly used, and the deliverable renminbi, called the CNH.

The thing I found most interesting during the 3-days of devaluations in the non-deliverable renminbi, was that the CNH moved along side, there was no compression of the spread between the two currencies.

Hmmm… but last night the compression converged to parity with the non-deliverable renminbi. Double hmmm…

I see this as a move toward a more market-driven price, don’t you? Well, regardless. I do.  and that has me thinking about China moving toward a floating currency sooner rather than later.

I know, I know, a lot of that is trader talk and mumbo-jumbo for a lot of people, but stick with me, and you’ll see that the Chinese devaluations set up this ability for them to move toward a floating currency.  That’s really all I’m saying, so throw out all that “trader talk” about compressions and converging!

The currencies are a mixed-bag-o-nuts this morning, with the euro rallying again, and in the face of some not-so-great data prints, which only points out what I’ve been saying all week, and that is that the euro has benefitted from the Chinese devaluations, as money continues to leave China, and go home, wherever that is.

This morning it was second QTR Eurozone GDP, which was up +0.3%, but failed to meet the expectation of 0.4%. Germany’s print was +0.5%, and +1.6% Year on year. So, it wasn’t the German economy that failed to perform!

Speaking of the outflows of money from China…

The latest data on renminbi positions on the balance sheet of the Peoples Bank of China (PBOC) shows that there was a drop of 308 billion renminbi from a month earlier. Now that’s what I call outflows!

I have to say that I’m seeing something that was bound to happen come to fruition. And that is the Currency Wars, where all the countries debase their currencies to promote economic growth through exports, are finding that when everyone else is doing the same thing, there’s no benefit received.

And then when the rest of the world is wallowing in the economic mud, it doesn’t matter how cheaply the goods that come into each respective country are, because if the people have hunkered down to ride out the weak economy, they aren’t buying! And then what does the country do with their debased currency?

I think I’m seeing this, and I think the proof in the pudding will be in the next trade data we see from Germany.

If this is playing out the way I think it is, we’ll see that the ultra-low euro value isn’t helping with Germany exports, and that will illustrate the picture I just painted for you. Of course we could also see the proof in the pudding with the next trade data from China, but, I think Germany would be a better read.

The worst performer overnight was the New Zealand dollar/kiwi. New Zealand printed their second QTR Retail Sales data and it was weak, and that brought the rate cut bugs out of the wall boards again.

N.Z. second QTR Retail Sales were just +0.1%. In addition, the ratings agency, S&P lowered the credit ratings on 7 N.Z. financial institutions, pointing out that the housing bubble in Auckland is not going to end up so good for these institutions.

But the rot on kiwi’s vine this morning hasn’t carried over to New Zealand’s kissin’ cousin across the Tasman, the Aussie dollar (A$), which has carved out a ¼-cent gain this morning.  That’s a good thing for the A$, to not be dragged down here.

That’s it for today. I hope you can go out and make this a fantastico Friday!

Regards,

Chuck Butler
for The Daily Reckoning

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

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