Prepare for Currency Chaos

FT: China markets stabilise on state intervention

“At this point everyone expects (renminbi) depreciation, but the central bank doesn’t want to let things get out of control. They’re focused on preventing systemic risk,” said the head of forex trading at a Chinese bank in Shanghai.

Lars Christensen: PBoC should stop the silliness and float the RMB

Instead it is about time that PBoC either let the Renminbi float completely freely (which effectively would cause a significant depreciation of RMB) or implement a large devaluation – for example 30% – so to avoid any speculation of further devaluations and then introduce a peg to a basket of currency as hinted in December.

The problem with the present policy is that everybody in the market realizes that this is what we will get eventually and that has caused an escalation of the currency outflow from China and this outflow is likely to continue until the PBoC bites the bullet and introduce a completely new monetary regime. This halfway house will not stand for long and if the PBoC keeps fighting it the central bank will just do even more harm to the Chinese economy and potentially also cause an major banking crisis.

A 30% devaluation takes the Chinese yuan back to its hard peg level of 8.28 to $1. Lots of ways to profit from this, including bets on Trump winning the presidency, carnage across emerging markets, possibly Saudi Arabia and maybe even Hong Kong dumping their pegs as the world de-dollarizes.

The official forecast here is still that the U.S. dollar system dies by deflation. Fiat currency burns from the periphery to the core. The fire rises in 2016 and the transition to a new financial order will take many years to play out. If the old U.S. dollar cycles hold and this dollar bull tops out in 2017-2019, it could take until the mid-2020s before the U.S. dollar breaks its lows set in 2008. The strains will be visible much earlier, but a crisis in the U.S. dollar itself may not unfold until then.

From 2013: Here Comes the Global Rebalancing; What Happens to USD/XXX If XXX Goes to Zero?

The big wildcard is China.

The yuan is moving in the wrong direction. China targets hot money inflows with new forex rules

Indeed, the hot money is showing up as faster money supply growth: China April New Yuan Loans, Money Supply Exceed Estimates. Something will have to give in China.

All the while, the U.S. dollar and U.S. assets will absorb capital seeking a safe haven. It doesn't matter that gold should be a safe haven in this scenario because so many investors have gotten it wrong. The gold bulls nearly all expect U.S. hyperinflation and a major U.S. dollar rally could crush the gold bulls, while the rest of the market is anti-gold and will look to other assets. Therefore, I can foresee a massive decline in gold prices if this scenario plays out. It will be the buy of at least three lifetimes because a U.S. dollar bull will be temporary as the U.S. will eventually succumb to the deflation too, but investors may continue selling gold even when it reaches insanely cheap levels.

This was how the greenback was lining up with history back in late 2014:

Here it is today:

Possible correction coming up before a run to 120 or higher?

Also from 2013: Death of the U.S. dollar greatly exaggerated; Historic U.S. dollar rally still likely

The U.S. dollar is the core of the global financial system and global powers, including China, will seek to preserve it as long as possible. As each nation passes through hyperinflation, however, they become freed from the global financial system via devaluation. At that point, the cost of launching a new financial system have been paid up front. As each nation goes through hyperinflation, it puts the U.S. dollar in a more untenable situation and makes a nation more likely to defect to a new system. Since gold will likely be a part of a new financial order, even if there is deflation it is wise to obtain physical metal, but the ultimate denouement of the U.S. dollar may be years away.

Key line in 6.8 yuan to $1. Beyond the only reference point is 8.28 yuan per $1 peg that existed for more than a decade before ending in 2005. A 5% drop in CNY will take out the 6.8 level. If the drop in USDCNH was proportional in percentage terms, it would trade above 7.

Gold would go below $1000 if the deflation scenario plays out, but the yuan price of gold may rally.

Reuters: Foreign banks in China could face curbs if they snub gold benchmark

China has warned foreign banks it could curb their operations in the world's biggest bullion market if they refuse to participate in the planned launch of a yuan-denominated benchmark price for the metal, sources said.

...A yuan fix would not be seen as an immediate threat to the gold pricing dominance of London and New York, but it could gain momentum if China's currency becomes fully convertible.

Or say, amid a yuan devaluation and collapse in dollar gold prices driven by the paper market, the yuan spot market traded substantially above NY or London paper prices, such as 10-20%. Then which is the real market?

China and other emerging market central banks aren't alone in feeling the heat: Sweden Prepares For FX "War" With Bloodthirsty Hedge Funds

“The market seems eager to challenge the Riksbank and there are rumors that many foreign hedge funds are long kronor and see a weakening of the krona after a possible intervention as a good buying opportunity,” he said. Exporters are also “structural krona buyers” and will probably exchange their foreign revenue after a dip, he said.

Krona has been fighting depreciation versus the U.S. dollar, making a possible triple bottom in 2015.

Take the volatility trade in 2016.