Inflation About to Get Hyper? Coal Stocks Reach Breakout Line

Coal stocks.

I'll add a comment about the dodos who forecast China passing on higher costs via exports. to the extent their is global inflation, then all costs are rising and nothing is being "passed on," what hits China hits everyone else at the same time. If their is a country-specific hit from rising coal prices, it will be expressed via yuan depreciation as Chinese exports lose competitiveness. Each country's energy mix and how energy costs affect its balance of trade will become important factors moving forward.

Update: I neglected to mention a possible catalyst for today's coal move. Indonesia banned coal exports.

Reuters: Indonesia miners seek solution as coal export ban rattles sector

Indonesian coal miners want a quick resolution to a government coal export ban that has caused fuel prices to rise and could disrupt the energy supplies of some of the world's biggest economies.

The world's leading exporter of thermal coal on Saturday banned the shipments because of concerns it could not meet its own power demand, prompting President Joko Widodo on Monday to threaten to revoke business permits for any miners who failed to meet domestic market requirements.

The wider risk is of a knock-on impact on economic linchpins China, India, Japan, and South Korea, which together received 73% of Indonesian coal exports in 2021, shiptracking data from Kpler showed.

Watch that ADXY.

The End of the Inflation

The U.S. dollar is experiencing a great rally versus foreign currencies, but in truth it is the inflation in foreign money and credit being revealed.

ZeroHedge looks at it from the Asian perspective: What Happens Next?

Answer: an 18-year trendline breaks.

Some previous posts on the U.S. dollar are below:

From 2012: Chinese yuan is down for the year, more losses coming

One of my main reasons for predicting a depreciating Chinese yuan (and I've been wrong for about 2 years thus far) is that I expect a U.S. dollar bull market against foreign currencies, and the PBOC's switch to a currency basket means it will break with the U.S. dollar. Previously, China was adding euros during the first and second round of the Greek crisis, which structurally weakened the yuan (based on my expectation of euro depreciation). The above article shows that the PBOC hadn't followed its rhetoric and is only now relying on the currency basket, which could go a long way to explain the depreciation in May. The wildcard in the basket is the yen.

From 2013: Death of the U.S. dollar greatly exaggerated; Historic U.S. dollar rally still likely, pointing out hyperinflation, if it occurs, will start overseas and end with the U.S. dollar.

Also from 2013: Epic dollar rally coming. Link to Christine Hughes of OtterWood Capital explaining how Abenomics will doom Japan.

Watch Out For The Shock, It's Coming

How Do You Cry Havoc in Chinese? 发出屠杀的号令，让战争的猛犬四处蹂躏！

China has joined the currency wars and now all Hell can officially break loose. Cue the epic U.S. dollar rally. Keep your eye on the Asian Dollar Index, a sustained break below 114 will signal a bearish breakdown. For the U.S. Dollar Index, watch for a sustained break above 89.

March 2015: Historic U.S. Dollar Rally Underway

Christine Hughes of OtterWood Capital outlines how the U.S. dollar could experience an epic short squeeze, a bull rally that will be one for the history books. She doesn't talk about the yuan, but it will not be able to ride this squeeze higher amid a domestic slowdown.

The yuan is also the king domino in a dollar squeeze scenario. Once it goes, all the dominoes are going to fall, each one adding more rocket fuel to the rally. In terms of fireworks, however, the yen may be the "winner" among major currencies——assuming the eurozone doesn't break apart.

Dollar Rally Still In The Early Stages

Offshore Yuan Plunges After Yuan Devalued From 6.12 to 6.22

Offshore yuan (CNH) down more than 1% at the moment, falling from 6.21 earlier in the day to 6.28, currently trading at 6.2733. The move sends the Asian Dollar Index (ADXY) to a new 52-week low.

Singapore Dollar Slumps on Much Weaker Yuan Benchmark Rate

USD/SGD jumped as high as 1.3903 from around 1.3812 after the People’s Bank of China unexpectedly set the daily yuan benchmark rate sharply weaker versus the U.S. dollar. The PBOC’s daily fixing rate of 6.2298 versus Monday’s benchmark of 6.1162 implies a 1.8% depreciation of the yuan versus the U.S. dollar.

Here's a chart of the yuan from the PBOC website, showing the central rate:

Daily trading range may be expanded to 3% in Q3.
人民币汇率波幅扩大时机成熟 三季度有望扩至3%

RMB exchange rate volatility to expand the time is ripe
The third quarter is expected to be extended to 3 percent, analysts said the expansion of the RMB exchange rate flexibility, to let the market decide the yuan exchange rate more in line with the needs of China's economic transformation
The third quarter is expected to be extended to 3%
Analysts said the expansion of the RMB exchange rate flexibility, to let the market decide the yuan exchange rate more in line with the needs of China's economic transformation
August 10, the central parity of the RMB against the US dollar reported 6.1162, compared with the previous trading day slightly rose 8 basis points. In fact, since March of this year, the RMB exchange rate has been maintained at 6.2 near sideways, devaluation or sharp appreciation of the RMB exchange rate does not appear the situation, two-way volatility distinctive characteristics.

The PBOC was Propping Up The Yuan Ahead of SDR Inclusion, perhaps inclusion looks farther away?

More on yuan devaluation here.

From ZeroHedge: China Devalues Yuan Fix By Most On Record, Plunges To 28-Month Lows Against The Dollar

PBOC TO PROMOTE CONVERGED ONSHORE, OFFSHORE YUAN EXCHANGE RATE
*PBOC SAYS TO CONVERGE ONSHORE, OFFSHORE YUAN EXCHANGE RATES

Also see The Informational Power of the Offshore Yuan Exchange Rate.

Asian Dollar ADXY Ready To Take Over For DXY

The Asian dollar index is nearing a support level near 110 (it closed at 111.70 on Friday). A move below would open up the possibility of a move to the lows from the 2008/2009 crisis, and then beyond.

How Do You Cry Havoc in Chinese? 发出屠杀的号令，让战争的猛犬四处蹂躏！

October was positive for the housing market as sales picked up. This story was at the top of the real estate section of iFeng today: 温州成炒房者的地狱 炒房如印钞的神话幻灭, the first part of which could be loosely translated as "house-flipper hell." Wenzhou prices have been weakening again with the rest of the country and prices are still down more than 20% from 2010. Certainly there's plenty of real estate sector folks who think rate cuts are needed, and China's retired real estate cheerleader, Ren Zhi Qiang, says this move is great news: 任志强：太乐观了.

There's a full blown recession in the industrial heartland of China. Industrial production in Liaoning slowed from negative 1.6% to negative 2.0% in October. Coal producing Shanxi province is still in recession, with industrial production rising slightly from negative 1.3% to negative 1.0% in October. No major negative shift in the economy though, not enough to warrant a surprise rate cut.

Then there's the statement from the PBOC: China’s PBOC Cuts Interest Rates for First Time Since 2012

“This interest rates adjustment is a neutral operation and doesn’t mean any change in monetary policy direction,” the central bank said in a statement on its website explaining the rate cuts. As China is still able to keep medium to high growth rates, it “has no need to take strong stimulus measures, and the direction of prudent monetary policy won’t change,” the central bank said.

China's economy doesn't need lower interest rates as much as it "needs" faster credit growth. China's credit crunch manifests as gray market/shadow banking interest rates that run into the double digits and rates over 20% are too common to be called rare. A cut in interest rates helps zero marginal borrowers because their problem is no one is willing to lend to them. Lower interest rates makes lenders less willing to make loans.

If the rate cut isn't about real estate, and it's not about economic growth, and it's not about credit growth, why did they cut rates? Likely answer: Japan's surprise yen devaluation. Interest rates, or rather the rate spread between two countries, has a big impact in currency markets.

No-one ever expects the PBOC

One can certainly also expect a response from South Korea and others in SE Asia (with the exception of Indonesia, given that the IDR has only just started to appreciate vs. the JPY), and a rate cut from India’s RBI (with WPI falling sharply on the back of the falling crude prices) also seems likely.

While the 1997-1998 period is the obvious precedent, the major difference is that Asian / EM central banks had only a very limited arsenal of FX reserves – total world FX reserves were less than 2.0 Tlrn and are now in excess of $13.0 Trln, much of which is an Asia. But this sort of currency war is really not at all helpful, and it is all the more ironic given that it follows Draghi’s comments earlier that “Draghi: QE in U.S.A, Japan has led to significant FX depreciation”, which is about as explicit as he can be in saying that he is pursuing a weaker Euro.

China has joined the currency wars and now all Hell can officially break loose. Cue the epic U.S. dollar rally. Keep your eye on the Asian Dollar Index, a sustained break below 114 will signal a bearish breakdown. For the U.S. Dollar Index, watch for a sustained break above 89.

As for the Chinese translation of "Cry 'Havoc!' and let slip the dogs of war," here are two possibilities: 发出屠杀的号令，让战争的猛犬四处蹂躏！and
下令抢劫！让战争的恐惧溜走吧！

Asian Dollar Index Nears Major Support Line

Way back in January I wrote, The Party Starts When ADXY Falls Below 114. It bounced during the year, but is again approaching support and the weak yen is probably going to be the catalyst that finally breaks support and sets off currency devaluation in Asia. The ADXY is 36.9% CNY, 11.8% HKD, 11.6% KRW, 11.5% SGD, 9.2% INR.

Renminbi Selling in HK Begins Again

The offshore yuan market is heading lower once more. Keep an eye on the Asian Dollar Index. The yuan is by far the largest component. It isn't a volatile index, but it also isn't far from the major support level of the past 4 years or so. If ADXY breaks, the equilibrium will be broken. The US Dollar Index is very close to a post 2008 high as well and the euro down at 1.25 isn't in good shape either.

I'm not pressing the panic button, but a chill wind is blowing.

The Informational Power of the Offshore Yuan Exchange Rate

Offshore Yuan Sinks; Major Yuan Devaluation Looms

Offshore yuan price is leading the market lower as it did in 2012.

ADXY is 36.9% CNY. A drop below 114 would take out multi-year support.

ZeroHedge has a roundup of all the pain that begins should the yuan fall again tomorrow. Based on the current fixing, the yuan can sink as low as 6.28 if traders want to take it there.

The "Real Pain" Is About To Begin As Chinese Currency Slumps To 19-Month Lows

It closes with a quote from another yuan bear, Russell Napier of CLSA.

“Mercantilist alchemy transmutes China’s external surpluses into foreign exchange reserves and renminbi. But with capital outflows from China at record highs, those surpluses are only maintained due to its citizens’ foreign-currency borrowing. Bank-reserve and M2 growth are already near historical lows and are driving tighter monetary policy. This will lead to severe credit-quality issues and force the authorities to accept a credit crunch or opt for a major devaluation of the renminbi. They will do the latter; and despite five years of QE, the world will get deflation anyway.”

The Party Starts When ADXY Falls Below 114

It may not break this time because an intermediate bottom may be put in by the end this week or early next week, but this is one of the most important charts to watch.

ADXY is 36.9% CNY, 11.8% HKD, 11.6% KRW, 11.5% SGD, 9.2% INR

ADXY Still Climbing

Until this chart breaks south again, it will be relatively smooth sailing for emerging markets.