Second guessing the politicians

These days playing the markets increasingly means guessing what the PTB are likely to do next. Or to put things another way, it means guessing the interplay between intervention in markets on the part of governments and their buddies on the one hand, and the laws of economics on the other other. 

As usual in China, these games are much more out in the open then in North America or Europe, where there is still considerably more song and dance. Current case in point is the RMB/USD exchange rate, which has been pegged at or around 6.82 RMB/USD for the past several years.

Sticking to the peg over the past several years has led to a lot of RMB printing, helping to create a huge bubble in real estate prices, with price levels of residential housing stock now reaching 3.5x official GDP.

While all this Chinese printing has no doubt been impressive, clearly the Fed’s electronic printing presses still have an edge. In that light, it is absolutely obvious that a RMB revaluation is going to happen sooner or later. Every day the government waits means a little bit more pressure on the real estate bubble. But how long can it wait??

In the spring the government finally announced it was supposedly “yielding to US pressure” to unpeg the yuan. In that case unpegging meant a movement down to about 6.76 (approximately 1%). But just to keep everyone on their toes, the government then proceeded to slowly correct back UP to 6.81. Markets are supposed to move up and down, right? Right…

Last week the rate began to once again head south, with a major swing down on Friday afternoon. Notably, bid-ask spreads on the NDF (non-deliverable forward) market increased dramatically, from 75 to 200 pips. Does this mean someone in the market knows something we don’t?

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One Response to Second guessing the politicians

  1. two_worlder says:

    they certainly do.

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