Yuan Collapse Will Unleash Global Price Deflation

Russell Napier: "The Most Dangerous Thing In Finance Is The Thing That Never Ever Moves - Until It Moves"
Since the PBOC cut interest rates in November 2014 and then yesterday reduced the banks reserve ratio the 12 month deposit rate has risen from 300bp to 465bp! Is this falling or flying? Sources familiar with the PBOC’s plans report to Bloomberg News that a further widening of the trading bands for the Yuan is being considered. Monetary policy is tightening, not easing and the PBOC will respond by jettisoning its exchange rate target. How much style they can muster for the fall only time will tell but this will be falling and not flying.

The PBOC are preparing to fall because of their failure to generate sufficient reflation while simultaneously maintaining the exchange rate with the USD. Something has to give and the result won’t be the exhilarating flight of reflation but instead an initial global deflationary shock that will see exports pour out of China at ever lower USD prices as the Yuan declines. Few will then believe in the omnipotence of central bankers: style over substance may still not have gone out of fashion, but style will just be style and falling, well, that will very much be seen as just falling. Ignoring the rapidly approaching ground and seeing falling as flying brings tranquility of mind but is that what they pay you for?
If the trading band is widened, dollars will fly out of China.

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