Are China's Market Woes Just Business as Usual?

At the end of April 2015, FXI — China’s prestigious Xinhua China 25 index, a key indicator of China’s stock market value — climbed dramatically, reaching over US$52 per share. By 5 September, the index had dropped to a low of about US$33 per share, representing the destruction of almost 40 percent of its value for the period and trillions of dollars in total. Both retail and institutional investors in China felt the bite. As financial markets react, the question remains, what is happening in China? Is the Chinese economy likely to collapse?

Lingering Rate Hike Potential and Dollar Strength

The US dollar rose against all the major and emerging market currencies over the past week, save the Russian ruble, which gained about 1.5%.  Comments from several Fed officials, and most notably Yellen, drove home the message, which arguably was diluted after the FOMC meeting: A rate hike this year is still the most likely scenario.  This helped bolster the greenback.

Putting the Brakes on Overreaction to VW's Euro Influence

The emission scandal at the world's second largest automaker, Volkswagen, has reportedly "rocked" the German political and business elites.  Some have argued that it will rival the refugee challenge for Germany.  Others have argued that it is a source of euro weakness.

To be sure, Volkswagen is the not first automaker caught manipulating its emissions tests. Ford did a similar thing with its vans in 1997.  Hyundai and Kia paid $100 mln in fines last year for fixing their tests.

Conflicting Goals and Interests Stymie the Renminbi's Path to Float

There are conflicts among the many objectives shaping China’s exchange rate policy. Politically, China’s leaders are keen on having the renminbi become a major international currency. For this purpose, the renminbi needs to be strong and stable enough that others will use it to settle trade balances and as a reserve currency. The People’s Bank of China’s (PBoC) near-term objective is to get the renminbi into the International Monetary Fund’s basket of elite currencies — the Special Drawing Rights.

The Fed, Dollar, and Dollar-bloc Currencies

The US dollar is mostly little changed against the major currencies.  The chief exception is the yen.  Its apparent purchases on the crosses succeeded in pushing the dollar from near JPY120.50 to almost JPY119.80.  Lower US bonds yields and falling stocks in Europe may have been the trigger in an otherwise light news session.  Recall Tokyo markets remain closed and will re-open Thursday.

Currency Movement after the Fed No-decision

The US dollar sold off in response to the Fed's lack of action, but it rebounded to close firmly before the weekend.  For the week as a whole, it was mixed.  The Australian and New Zealand dollars were the strongest of the majors, advancing 1.3%-1.4% against the greenback. They extended those gains on Friday, even though the dollar was firmer against most of the other majors.

For Every Long, There is a Short

The average daily turnover in the foreign exchange market is over $5 trillion a day.  Many traders and analysts put considerable weight on market positioning.  However, it proves very elusive.

Interpreting the Renminbi Devaluation

The verdict on China’s recent currency devaluations differs depending on to whom you listen. To some, the devaluations are either a positive and responsible step in the direction of a more market-determined exchange rate and a liberalised financial system. To others, they are potentially destructive; beggar-thy-neighbour competitive devaluations intended to prop up declining GDP growth by unfairly boosting exports.

Which Yuan Do We Watch?

When China engineered a mini-devaluation of the yuan in August, it succeeded in closing the prior gap between the fix (central reference rate) and the spot onshore yuan.  One of the prices of doing so, however, was the widening of the gap between the onshore (CNY) and offshore (CNH) yuan. 

Where Currencies Stand (and Fall)

There are three key developments today. After seemingly spending recent months pursuing a controversial political agenda, Japan's Abe has returned his attention to the economy to propose corporate tax cuts. This lifted the Nikkei a stunning 7.7%.  The UK industrial output and trade figures disappointed.