The Time To Watch China For Clues Is Now


I have been pounding my fist (and keyboard) arguing that, for all intents and purposes, all eyes should be on China, for the country could be on the verge of releasing an overnight surprise with a sudden devaluing of its currency, the yuan.

This move can come in a few different ways. First, it could be instigated by the politburo. Or second, the politburo could just stand aside and let it run, should the ball ever start rolling in earnest. There are more, but the results are the same. For what if it begins where we are in the “markets” currently? And the “markets” interpretation (and positioning) that the odds of such are minuscule? Not to beat a “dead horse” (or should I say bear?), but the ramifications could make August of 2015 look like a cake walk.

In a recent article, I stated that the “market” was far, far, far (did I say far?) too complacent with its projections of this upcoming March meeting of the FOMC (Federal Open Market Committee) and it being considered “off the table” as opposed to being “live.”

All I heard over the past week from across the financial media was how March was indeed “off the table” and how May or June was the time frame to be concerned with. My, what a difference a few days makes is all I say too that.

On Monday morning (China time), the politburo (once again) set the cross rate of the dollar and the yuan higher at 6.8814. That was a subtle yet important clue for those trying to figure out what China may or may not be thinking. Or at the least – signaling. Again, that fix represents not only a weaker yuan, but once again, on Monday, it shows the politburo setting the tone for the week. I believe that’s a distinction with a difference.

As I stated on that Sunday prior: there was nothing in those released minutes for the February meeting that implied dovish tones rather than hawkish. The entire financial/business media touted otherwise. That is – until this Monday afternoon (U.S. time), when none other than Reuter reported the odds of a March hike surged “out of the blue” up to a 50% probability. As long-time readers know, that’s precisely where I stated they should be and wrote why.

So why did this happen? Fair question, to wit:

“Dallas Fed’s Kaplan said this morning that a rate increase should happen sooner than later, adding that “[The Fed] wants to prevent a situation where we fall behind the curve.” As Reuters notes this is entirely consistent with his and colleagues’ recent comments, but somehow strikes a chord on otherwise uneventful day.”

As I stated in an article the week prior:

“China has thrown buckets of capital at not only the Yuan, but its credit markets in unison – and capital flight is accelerating still on all fronts. All while the $Dollar strengthens, and Yuan weakens seemingly against the will of both monetary bodies.

So again, with all the above for context, as I said in the title…

If March Is indeed “live?” Then so too is the mother of all monetary shocks.”

Guess what happened today? Hint: As reported by Bloomberg…

“Fed’s Williams Says March Hike To Get ‘Serious Consideration'”

So now you have on both Monday and Tuesday two more Fed members talking up a March “live” scenario – and to reiterate, it’s only Tuesday. Still think the idea that March had been clearly taken “off the table,” as the so-called “smart crowd” argued?

Now you have the U.S. president addressing Congress for the first time, laying out his budget ideas. Depending on how it’s received, the dollar could go either way.

If it starts falling (based on how the “markets” interpret the way to pay for it), it might help lessen the ever-growing issue in the USD/CNH cross rate, allowing China to at least take a breath. But I also believe that’s wishful thinking and won’t be able to suppress the ever-growing worry China is facing of the Fed hiking again, and so soon.

I truly believe it (China) is teetering on a capital flight problem that is unimaginable to most in both scale and speed, should it begin. And the Fed is making it more crystal clear by the day that it just may, in fact, raise again in March, exacerbating the problem ever the more.

If the speech appears (or China interprets it as such) to put the country directly into some form of crosshairs – be it trade, currency manipulator status, etc. – all while the Fed itself allows the narrative for raising in March to grow ever the louder, watch for China to be the one sending an “out of the blue” message (e.g., a sudden yuan devaluation) before the next FOMC meeting.

As always, we shall see.