PBoC Wizards Sell RRR Cut, USDCNY Through 7.00 This Year

China suffers annual cash crunches around the time of Spring Festival because China is still a heavily cash economy and the holiday is similar to Christmas in the amount of spending. When liquidity is already tight, it has caused noticeable spikes in SHIBOR. The central bank usually met the demand with monetary emissions.

Not so this year. Instead, the PBoC announced a 1 percent cut to the reserve requirement ratio. It is probably true that the RRR cut will also cover Spring Festival liquidity needs, but the PBoC wizards are trying to sell you on it because they don't want you looking at the weakening economy.

RRR cuts in the recent past have been bad news. The RRR cut in January 2018 was bad news for emerging markets. The second cut in April 2018 was really bad news because the EM collapse and U.S. dollar rally can be pinpointed to China's surprise announcement. China cut another 1 percent in October 2018 and while I was wrong in expecting USDCNY to push towards 7.00 and a breakout, it wasn't a great time for global financial markets. Now China has cut the RRR by 1 percent again.

Global markets responded positively to the news. ZH: China Announces RRR Cut Plans To Cover Lunar New Year Liquidity As the ZeroHedge article points out, it is not a positive sign for the economy.

Bear market psychology is in effect with wild swings in sentiment and asset prices. Pinning the rally today on China's RRR move is close to impossible, but if today's rally was based on the cut, then I would absolutely fade it 200 percent.

Trade of the Year

The key price for global markets remains the U.S. dollar exchange rate. I still expect the dollar will move higher. The key exchange rate in a dollar bull market is USDCNY. Given the tight credit conditions in China, clear aversion to deflation and ability to force credit growth, I expect USDCNY 7.00 falls this year. A breakout will have major implications for the global economy and emerging markets.

More over, time is up. The window for the U.S. dollar bull market ending begins in 2019 and ends in 2020. If USDCNY is going through 7, it is going through this year. Otherwise, it isn't going through at all because the global economy is already (at the higher stages of production) turning the ship around.