Ok, dammit. There is apparently no stopping the yuan.

Back in late May/early June, the PBoC engineered an epic short squeeze. That effort included the introduction of an absurdly opaque “counter-cyclical adjustment factor” that, attempts to spin it notwithstanding, amounted to a partial rollback of the liberalization push instituted in August 2015.

The short squeeze could have been meant to appease Trump, but I would argue the more likely explanation was that China wanted to get out ahead of the June Fed hike. In March, the PBoC hiked OMO rates hours after the Fed, presumably in order to avoid a scenario that would have seen rate differentials move in favor of the dollar. But that avenue was well nigh exhausted by June. In order to avoid the risks inherent in overtightening (e.g. unwinds in trades financed via shadow conduits and pressure on inflation) Beijing instead chose to simply put a pause on the FX liberalization. They would intervene in the spot market multiple times over the next 30 days to ensure the yuan continued to strengthen. The point: ensure that the Fed hike didn’t end up contributing to more capital flight from China. Of course, markets interpreted the Fed as “dovish” and Trump’s trials and tribulations have kept pressure on the dollar, but it seems to me that China wasn’t interested in seeing how things were going to play out. They engineered yuan strength to inoculate themselves because right now, they seem to believe that the greater risk is renewed capital outflows, not a stronger currency weighing on exports.

Fast forward to today and the yuan is riding a truly incredible hot streak. We’ve documented this extensively. On Tuesday, that winning streak hit 10 days, marking the best run in 7 years.

Headed into the overnight session, some folks were out suggesting that bank earnings could create still more yuan strength.

“The downtrend for USD/CNH could receive another boost on Wednesday as China’s big four banks report earnings”

notable

— Walter White (@heisenbergrpt) August 29, 2017