Ugh, indeed.

Little did your author know when he titled Friday's post how tragically accurate the sentiment would be.   The horrific attacks on Paris hit close to home as your author was a resident 20 something years ago and still has friends there.  The tragedy of modern life is that senseless acts of violence are not only a regular feature, but also brought to the public's attention in real time to terrify and dismay via a dizzying array of media.  There's not often much call for French Symbolist poetry on financial websites, but in some ways, 'tis truly Une Saison en Enfer.

Unfortunately, such events are often used by adherents of various political camps to assign blame to supporters of opposing views.   The reality is that the answer to "how and why did this happen?" is considerably more nuanced than "not enough guns" or "too many guns" or "too many immigrants."  Similarly, the solution- if there is one- will be more complex than simply carpet-bombing certain patches of the desert.  Beyond anything else, such an approach leads to tragic collateral damage, as we've seen recently.

Although Macro Man was not previously familiar with the Jordanian journalist Fouad Hussein, over the weekend he saw a link to a 10-year old article in Der Spiegel summarizing a book from Mr. Hussein in which he lays out al-Qaeda's 20 year roadmap.  (H/T: @political_fun via @Nictrades.)  It's really quite chilling how accurate the playbook has been to date.

Ultimately, such a complex problem is going to generate a wide variety of views.   It's not your author's place to tell you how or what to think, but he would request that any ongoing comments on the subject be thoughtful and non-inflammatory.

It's always difficult to analyze markets through the prism of tragedies like this without feeling a little mercenary.  Perhaps Macro Man is scarred from hearing an unsavoury colleague half-gloat that he was long CHF once on the morning of another very well-known terrorist attack.

Generally speaking, Macro Man's view is that market estimation of the real economic impact of such events- and thus their impact on price- is generally over-stated.  Probably the closest analogue we have is the Madrid train bombings; looking at a chart of Spanish GDP growth over the period, could you pick out which quarter saw the bombings without looking it up?

The conundrum, of course, is that markets were already looking ropy before the Paris attacks, and while it's important not to over-react, by the same token it's equally vital not to ignore the underlying momentum and narrative.  For choice, Macro Man could easily see an opening gap lower in European equities (such as we've observed in Spooz) before rallying to unched or slightly up on the day.  After that...well, we'll see, but let's just say that there's a reason your author doesn't refer to himself as 'Day Trader Man'.

Elsewhere, China took a step closer to joining the SDR with a statement from Christine Lagarde stating that the IMF's technical paper has found that the RMB meets the criteria for inclusion.  A vote will be held to rubber stamp the decision later this month.

What impact will it have?   Not a whole lot, to be honest.   It seems likely that the RMB will have roughly the same weight as the GBP or JPY- that is, roughly 10%.   Given that the total SDR allocations outstanding are ~ 204 billion ($282 billion at current exchange rates), that would suggest that the RMB would comprise roughly $28 billion of that.

Of course, SDRs are units of account rather than currencies, and as such they sit in an account until the holders want need to exchange them for the basket of underlying currencies.   It would seem highly unlikely that that every single holder of every single SDR would wish to redeem, thus creating demand for $28 billion worth of RMB. 

In reality, the actual transactional flow should be fairly modest; China's inclusion in the SDR is more a signalling mechanism about the internationalization of the RMB than anything else.  Eventually, this will need to mean a more free floating FX regime; after all, what's the point of including the renminbi if it's just going to act like Dollar Jr.?

How the authorities accomplish this with the current capital outflow pressure and a still massive trade surplus is a tricky question.   In reality, there are two equilibrium exchange rate levels for China:  one for the trade account (<6 account="" and="" capital="" for="" one="" the="">7).  Stuck in the middle is perhaps the least worst outcome, as long as the PBOC can manage it, until the two equilibria come back in line.

It is for this reason that Macro Man expects general stability in the RMB exchange rate for a considerable period, though he recognizes and acknowledges the attraction of getting long USD/CNH at the right price (i.e, on dips rather than rallies.)  Hopefully, in the coming months and years we can spend a lot of time talking about these sorts of issuese and very little on religion, terrorism, and warfare.