China has resorted to its old habit of stimulating the economy by allowing the Yuan weaken. But while the "remedy" has yet to work its wonders. The side effects, are already emerging—inflation is on the rise.
The People's Bank of China, China's central bank, ought to decide - support China's manufacturing or curb inflation.
What will the Chinese central bank do? And equally important, how will the dollar respond?
China's Central Bank: The Logic
In order for us to try and gauge the next move by China's central bank, we must delve first into the logic. In other words, what is the central bank considering? Now, that's not an easy undertaking, by any stretch of the imagination. Nevertheless, the task has turned a tiny bit simpler. Last month, in an interview with the Caixin Weekly, the Governor of the People's Bank of China, Zhou Xiaochuan, outlined the central bank's policy.
China's financial markets are caught in what some are calling "the perfect storm." It's been roughly six months since the situation dramatically escalated. As of yet, there are no signs of a calming sea.
Thus, there are more and more very vocal voices calling for China to enforce capital controls to save the Yuan. The intent is to keep the Chinese dragon from losing its balance.
Last Monday, the International Monetary Fund (IMF) endorsed the inclusion of the yuan in the fund's Special Drawing Rights (SDR) basket effective on Oct. 1, 2016. The Chinese currency has now joined the elite global currency club and will be the fifth member alongside the US dollar, the euro, the sterling and the Japanese yen.
Beijing has long hoped that the renminbi (another name for Chinese currency) would enter the privileged short list of world currencies, and it finally succeeded last week. But, first and foremost they are celebrating a political victory.
Some experts doubted that the yuan could be judged as "freely usable," which is the main criteria for inclusion to the SDR, but the reality proves that the stronger one is right despite such obvious contradictions as tight currency control and shares sale ban. Continue reading ""Enter The Dragon" Starring … Gold"→
China's economy is slowing. Its stock market began to crash back in July. And the volatility rocking financial markets has been widely linked to the recent yuan devaluations by China's central bank.
"Surprise" has been a common word used by investors and financial pundits to describe the devaluation -- as in, "China's central bank surprise devaluation of yuan."
But what if we told you it wasn't a surprise -- it was in fact an expected event?
Below are three excerpts from analysis that EWI's own Chris Carolan published in his Sun-Tue-Thu Asian-Pacific Short Term Update on July 30 (several days before China's central bank first move to devalue the yuan against the U.S. dollar), then on Aug. 9 and Aug.11 (bold added).
The Fed rate decision is approaching quickly. Will the Fed choose to ignore the headline inflation figure and China's woes and decide to press on with a rate hike this month? No one really knows what they'll decide. One might conclude then, that if the Fed rate decision is a guessing game, so is the Dollar, right? Wrong! In fact, the Fed rate decision could be one of the best times to pile on to the Dollar and buy it cheap.
Fed Rate Hike Not Priced In
With all that talk of a Fed rate hike it might seem that a Fed rate hike is now priced in. But that's not the case. As the data from the CME Fed Fund futures prices, the market sees only a 25% chance for the Fed to raise rates this September. And that could explain why the Dollar Index took a dip over the past weeks.
But here's where it gets really interesting. When we move forward on the calendar and examine the probability of a rate hike by December, the likelihood jumps to 59%. If we continue to move on into March 2016, that probability jumps to 77%. That means markets are almost certain that the Fed will raise rates at least once in the coming two quarters. Continue reading "Fed Rate Decision: Buy the Dollar on the Dips"→