Chinese Yuan Suddenly Tumbles

Whether or not the PBOC finally decided to show the US it means business with the “weaponized” Yuan, but moments after today’s PBOC yuan fixing, which dropped against the dollar by a whopping 340 pips to 6.6497 from 6.6157 – which was slightly lower (i.e. stronger) than expected – the offshore yuan tumbled with the selloff accelerating as the currency took out one large figure after another, eventually crossing what until now had been seen as a key support level at 6.70, then quickly shooting lower and dropping as low as 6.73.

As shown in the chart above, the offshore Yuan has suffered a 10 handle drop in the span of 24 hours, an unheard of move either during the Chinese devaluation phase in the summer of 2015, or the subsequent capital outflow panic in early 2016.

As we noted this morning, yesterday PMI showed that growth momentum in the country is softening, while new export orders slumped into contraction as China’s growth dynamo suddenly goes into reverse. 

And while there are still those naive “experts” who claim that the Yuan move is not in response to Trump’s trade war, or even more laughably that 2018 is in no way like 2015 (for JPM’s explanation why 2018 could be far worse than 2015, read this), the next chart makes it quite clear what Beijing is doing to “punish” the Trump administration.

Some have suggested that China began in early April to allow the Yuan to weaken against the USD (but not against the rest of their trading partners), but in the last few days they have lost control.

The sharp drop is in line with our observations earlier today, which noted that one way or another, both the USDCNH, and Yuan vol, are set to spike in the near term. Now it turns out the near term was even nearer than we thought. This is what we said:

will China, whose currency just had its worst month in history, seek to devalue even more aggressively? Until now China has appeared to take a view that the last thing it needs is to interject CNY weakness into the equation and complicate negotiations with the US. However, the recent price action itself suggests this resolve to keep USD/CNY stable is weakening.

Worse, with the Yuan plunging, Yuan vol is surging, which in turn creates a feedback loop resulting in even more selling, leading to even more vol and so on:

The market is taking a view that China will make sure that USD/CNY is not going to intercede in ongoing negotiations with the US that will straddle the Congressional mid-term elections. However, for a currency pair that has moved from 6.38 to 6.65 since mid-June, vol still looks extraordinary low.

Well, we can now make it 6.73, as the collapse in the Yuan is accelerating.

And now we sit back patiently until Peter Navarro spots what is going on in the FX market, and how China’s stealth devaluation is no longer stealthy and tells Trump all about it, leading to the next serious of escalating trade war outbursts.

Meanwhile, expect more fireworks: the week’s key date is Friday, July 6 when 25% tariffs totaling $34 billion go into effect against Chinese exports. We already know one way that Beijing will retaliate.