China’s 2016 Yuan Policy

What is China doing with the Yuan?

1. Front loading yuan weakness

2. Yuan depreciation is a policy tool. With SDR decision in the rearview mirror, China is stepping up their currency reform. Its the first year of their 5 year plan to rebalance the economy

3. Yuan intervention overnight is a familiar tactic used by the PBoC. Back in August, they weakened the Yuan 2% and then intervened by ordering state banks to buy yuan in an effort to drive out speculators.

Why are they doing this?

1. Currency is Overvalued

2. Weaker Currency is Consistent with Monetary Easing

3. Its Competitive Devaluation

4. Necessary part of their plan to provide underlying support for their economy as they shift from export to consumption

Consequences

1. These actions will flame the currency war in the region

2. Kills the Fed’s chance of tightening in March

3. More outflows

4. More yuan weakness with intervention to slow the decline

5. Yuan weakness is one of the greatest risks for the financial markets in the near term because a weaker yuan means less purchasing power for Chinese individuals and businesses = weaker profitability for US businesses selling to China

6.75 is our target for USD/CNY