Remember how, earlier this month, the yuan staged a rally so large that it qualified as a 6+ standard deviation event going all the way back to the end of the dollar peg?
That “black swan” event came courtesy of hopes that Donald Trump’s tweet about a phone call he had with Xi signaled the beginning of the end of a trade conflict that, if there’s no resolution when the two leaders meet at the G-20, could find the U.S. slapping tariffs on the entirety of Chinese imports.
The good vibes surrounding Trump’s infamous “very long, very good” tweet were turbocharged about 12 hours later when Bloomberg reported that the President had instructed aides to draft a trade truce which, presumably, would be presented to Xi later this month.
That confluence of upbeat news sparked the best day for Hong Kong and South Korean shares in seven years on November 2, just as the yuan staged the above-mentioned two-day black swan rally.
Fast forward ten days and the yuan has retraced virtually the entirety of that move to trade back through 6.96 amid the dollar’s push to 18-month highs.
Overnight, traders observed “at least one” big Chinese bank buying up USDCNH forwards, driving 1M and 1Y forward points up sharply.
There’s obviously an ongoing debate about how much more yuan weakness the PBoC is willing to stomach. Back in August, Beijing implemented a variety of measures to stem the yuan’s depreciation including the reintroduction of the counter-cyclical adjustment factor, a mechanism the PBoC rolled out in the summer of 2017 in an (ultimately successful) effort to engineer a short squeeze. That effort amounted to a rolling back of whatever liberalization was ostensibly embedded in the “new” FX regime that went into effect in August 2015. Effectively, they went back to manipulating the fix to control the spot but they also retained the discretion to intervene in the spot market (and they subsequently did), which effectively meant that in June and July of 2017, they were manipulating the fix and the spot and because the latter informs the former, the whole thing was fixed.
