Wednesday, August 18, 2010
It is now two months since Team Macro Man's arch nemesis, Voldemort, announced that it would increase the "flexibility" of the Yuan, a move many interpreted to mean the resumption of the gradual pre-Olympics pace of appreciation. But no, to TMM's and they are sure, many other punters' dismay, that is in fact *not* what it meant. It was just another worthless attempt to quell US calls for sanctions and to avoid being labelled a "currency manipulator" by the US Treasury, without actually changing anything. At the time, TMM was of the opinion that the timing had less to do with kowtowing to the US, and more to do with the fact that speculators had taken a hosing on their USDCNY NDFs and had stopped out of those positions (see chart below).
Because that's what they do. TMM is reminded of a time, many years ago when they were fresh-faced naive graduates doing a trading simulation where the guy running the training programme made the simulation do stupid things that make no sense and would never happen in real life just to throw us off. How mistaken we were... Perhaps the PBOC hired the guy?
A theme TMM are particularly swayed by at the moment is that competitive devaluations under the guise of "efforts to fight deflationary risks" are likely to result in trade frictions that have the potential to get nasty. As per yesterday's post, we think the Japanese have done their bit as far as being a good global citizen is concerned (the trade-weighted Yen has appreciated by 47% since it bottomed in 2007), and it is time for others to make a contribution. To be fair to the other big Current Account surplus country, Germany, their import growth has begun to outstrip their export growth, which means they are starting to do their bit, and the Eurozone as a whole essentially has a balanced Current Account. But the Chinese? They have done Nada.
It turns out "increased flexibility" just meant "we'll do a quick half-percent move so it looks like we're doing something and we'll just make it more volatile so we can screw the speculators". They must've learned that one from the French. In terms of cumulative appreciation since the announcement, we have pretty much flat-lined around 0.6% (chart below, purple line), looking not too different from the Hong Kong Dollar - a currency that is pegged (orange line). They say that they're targeting a Nominal Effective Exchange Rate-based policy, which is fair enough (Singapore do that too), but if they are, they clearly want their currency weaker because that's what it's done the past two months (green line).
Well, they certainly made it a bit more volatile, but it still looks a lot like the HKD:
But as far as TMM can see, they're just doing their usual currency piss-taking. TMM don't think it will be long before US politicians cotton on to this fact, especially if the Japanese do start to intervene, and the resulting noise could get very nasty.