Did Central Bankers Intervene to Prop Up CNY By Devaluing USD?

In the following weeks, everything seemed to change when European Central Bank Governor Mario Draghi and Bank of Japan Governor Haruhiko Kuroda did something entirely out of character. Rather than pushing down on their currencies and driving the dollar higher, they appeared to intentionally disappoint foreign exchange markets and allow their currencies to strengthen.

When Janet Yellen and her colleagues at the Federal Reserve could have taken advantage of a golden opportunity to hike the federal funds rate (according to their policy models), they held steady, reduced their 2016 tightening projections from four rate hikes to two, and expressed continued concern for global economic and financial stability.

Perhaps Beijing threatened to free-float the RMB and unleash hell if major central banks continued to drive the US dollar higher. Perhaps they pleaded for an opportunity to avoid the unthinkable. But in all three cases, the European Central Bank, the Bank of Japan, and the Federal Reserve began to act in a way that weakened the US dollar, made it easier for China to manage its capital outflow dilemma, and supported a reflation in global commodity prices.

...Again, we’re watching closely for signs of more lasting intervention. But should this weak US dollar environment persist, we believe it may be favorable for equities, politically stable emerging markets, commodity producers, and midstream master limited partnerships (MLPs) in particular. If, however, policymakers are unable or unwilling to do what it takes to change the US dollar’s long-term upward trajectory, then all these pressures will likely return as the Fed hikes interest rates more aggressively in the face of growing inflation pressures. Until we see more signs of confirmation, we intend to move slowly and cautiously...
I remain long-term bullish on USD and bearish on yuan, but if global central banks successfully coordinate a devaluation of the U.S. dollar in order to avoid a large CNYUSD depreciation, this is a major step towards dislodging the U.S. dollar as global reserve currency because it signals the subordination of Federal Reserve policy to global forces, specifically China.

If central bankers have indeed enacted this strategy (skepticism is warranted for now), I expect the Fed will be panicking by autumn. Crude oil year-on-year comparisons start looking very inflationary starting in July, should crude prices climb into the $50 range or higher.

Whatever the case, right now I prefer to be long gold miners and short various assets. If the dollar weakens, the gains in gold mining shares should do as well as other natural resource producers (though it would pay to rotate out of Canadian and Australian miners and into U.S. miners). If the bear market resumes, the shorts will hopefully pay off and, if lucky, gold prices will hold up in foreign currency terms or even rise in USD as investors price in central bank intervention.

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