Australia Is "Going Down Under": "The Bubble Is About To Burst", RBS Warns

Thanks to a variety of idiosyncratic political crises and country-specific stumbling blocks, Brazil, Turkey, Malaysia, and to a lesser extent Russia, have received the lion’s share of coverage when it comes to assessing the EM damage wrought by the comically bad combination of slumping commodities prices, depressed Chinese demand, slowing global trade, and a “surprise” yuan devaluation. 

Put simply, the intractable political stalemate in Brazil, the civil war in Turkey, the 1MDB scandal in Malaysia (and the fact that the country was at the center of the 1998 meltdown), and the hit Russia has taken from depressed crude prices mean that if you want to pen a story about emerging market chaos, those four countries have plenty to offer in terms of going beyond the generic “falling commodities + a decelerating China = bad news for EM” narrative. 

But just because other vulnerable countries aren’t beset with ethnic violence and/or street protests doesn’t mean they too aren’t facing crises due to falling commodity prices and the slowdown of the Chinese growth machine. 

One such country is Australia, which in some respects is an emerging market dressed up like a developed economy, and which of course has suffered mightily from the commodities carnage and China’s transition away from an investment-led growth model. 

Out with a fresh look at the risks facing Australia is RBS’ Alberto Gallo. Notable excerpts are presented below.

*  *  *

From RBS

Australia has become a commodity focused economy, with an increasing exposure to China. For the past decades, Australia has been buoyed by the rapid Chinese expansion, which outpaced the rest of the world. Australia benefited from China’s strong demand for commodities given its investment-led growth model. China is Australia’s top export destination and 59% of those exports are in iron-ore. But as China struggles to manage its ongoing credit crunch and continues its shift to consumption-led growth Australia’s economy is likely to be hurt by lower demand for commodities. 

The economy is slowing due to external headwinds. Last quarter, Australian GDP grew at just 0.2% QoQ, its lowest level in the last three years (and below the market consensus of 0.4%). According to the Australian Bureau of Statistics (ABS) the growth rate was driven by higher domestic demand, while lower exports and a declining mining industry continue to present headwinds. Mining’s gross value-added to GDP fell by - 0.3% QoQ in Q2. Despite Reserve Bank of Australia (RBA) governor, Glenn Stevens, citing lower growth as potentially a “feature of the post financial crisis world” meaning that “potential growth is a bit lower”, Australia’s slowing economy is more than just a victim of the post financial crisis world, in our view. Rising unemployment coupled with soaring house prices and vulnerabilities in the commodity and construction sectors are all cause for concern. 

Unemployment is rising, and could increase further, given the high proportion of employment in the vulnerable mining and construction sectors. Unemployment is at 6.2%, just shy of the ten year high of 6.3%.Although the number itself is not worryingly high, unemployment has been rising for the last three years, and is likely to continue in our view. Mining and commodity sectors employ 4.5% of the workforce. With lower demand for commodities from China, unemployment in these sectors could rise. Also, unemployment may rise in the construction sector (8.9% of workforce) given vulnerabilities in the housing market, as we explain below.

There are domestic headwinds, too. The housing market is vulnerable, with overvalued properties and over-levered households. House prices in Australia have risen by 22% in the last three years (according to the Australian Residential Property Price Index), with property prices in Sydney overtaking those in London. House prices have risen faster than both disposable income and inflation in recent years, with the gap between growth in house prices and household income closing by over 40% in the last three years.

If unemployment continues to rise, due to losses in mining and construction, the house price bubble could pop. Rising unemployment in the mining industry, due to its exposure to a slowing China, will create risks in the property market; house prices are likely to fall as the newly unemployed could be forced to sell.

The RBA has less dry powder now. The central bank has cut rates twice this year, from 2.25% in March to 2% now. As the domestic economy slows, accommodative policy is needed to encourage investment, particularly in non-mining sectors, to boost growth and create jobs. However, with rates already at 2%, there is much less headroom for monetary easing to offset a downturn in Australia.

The worst is yet to come, in our view.

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zerohedge.com/Tyler Durden/October 2, 2015

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The Fed Is Spooking the Markets Not China

Fasten your seat belts, this ride is getting interesting. Last week the Dow Jones Industrial Average was down more than 1,000 points, notching its worst weekly performance in four years. The sell-off took the Dow Jones down more than 10% from its peak valuations, thereby constituting the first official correction in four years. One third of all S&P 500 companies are already in bear market territory, having declined more than 20% from their peaks. Scarier still, the selling intensified as the week drew to a close, with the Dow losing 530 points on Friday, after falling 350 points on Thursday. The new week is even worse, with the Dow dropping almost 1,100 points near the open today before cutting its losses significantly. However, no one should expect that this selling is over. The correction may soon morph into a full-fledged bear market if the Fed makes good on its supposed intentions to raise interest rates this year. Have no illusions, while most market observers are quick to blame the sell-off on China, this market was given life by the Fed, and the Fed is the only force that will keep it alive.

The Dow has now blown through the lows from October 2014, when fears over life without quantitative easing and zero percent interest rates had caused the markets to pull back about 5%. Back then when market fear began spreading, St. Louis Fed President James Bullard publically issued a few choice words which reassured the markets that the Fed stood ready to reignite the QE engines if the economy really needed a fresh dose of stimulus. By the end of the year the Dow had rallied 10%.

 

Amid last week's carnage, Mr. Bullard was at it once again. But instead of throwing the market a much needed life preserver, he threw it an unwanted anchor. He offered that the economy was still strong enough to warrant a rate increase in September. He was careful to say, however, that the Fed is still "data dependent" and will therefore base its decision on information that will come out over the next three weeks. So after nearly seven years of zero percent interest rates, the most momentous decision the Fed has made since the Great Recession will be dictated by a few weekly data points that have yet to emerge. Haven't seven years of data provided them enough information already? What's next? Will they have to check the five-day forecast to insure that there will be no rain before they pull the trigger? 

 

As I have been saying for years, the Fed has always known that the fragile economy created through stimulus might prove unable to survive even the most marginal of rate increases. But in order to instill confidence in the markets, it has pretended that it could. Wall Street has largely played along in the charade, insisting that rate increases were justified by an apparently strengthening economy and needed to restore normalcy to the financial markets. 

 

But the recovery Wall Street had anticipated never arrived, and traders who had earlier demanded that the Fed get on with the show, have now panicked that the rate hikes are about to occur in the face of a weakening economy. As a result, we are seeing a redux of the 2013 "taper tantrum" when stocks sold off when the Fed announced that it would be winding down its QE purchases of bonds.

 

The question now is how much further the markets will have to fall before the Fed comes to the rescue by calling off any threatened rate increase? What else could pull the markets out of the current nose dive? 

 

Think about where we are. Stock valuations are extremely high and earnings are falling and the economy is clearly decelerating. The steady march upward in stock prices has been enabled by a wave of cheap financing and share buybacks. There are very few reasons to currently suspect that earnings, profits, and share prices will suddenly improve organically. This market is just about the Fed. After one of the longest uninterrupted bull runs in history, bearish investors have learned the hard way that they can't fight the Fed. So why should they now expect to win when the Fed is posturing that its about to embark on a tightening cycle?  

 

If the Fed were to do what it pretends it wants to do (embark on a tightening campaign that brings rates to about 2.0% in 18 months), and in the process ignore the carnage on Wall Street, I believe we would see a consistent sell off in which most of the gains made since 2009 would be surrendered. After all, how much of those gains came from bona fide improvements in the economy? It was all about the twin props of Quantitative Easing and zero percent interest rates. The Fed has already removed one of the props, and it's no accident that the markets have gained no ground whatsoever in the eight months since the QE program was officially wound down. 

 

As the market considers a world without the second prop, a free fall could ensue. Now that we have broken through the October 2014 lows, there is very little technical support that should come in to play. A free fall in stocks could be an existential threat to an already weak economy.  It should be clear the Janet Yellen-controlled Fed would not want to risk such a scenario. This is why I believe that if the sharp sell off in stocks continues, we will get a clear signal that rate hikes are off the table.

 

Of course, even if it does throw us that bone, the Fed will pretend that the weakness was unexpected and that it does not come from within (but is caused by external forces coming from China and Europe). Using that excuse, it will attempt to prolong the bluff that its delay is just temporary. For now at least Wall Street is happy to play along with the blame China game. This ignores the fact that China has had much bigger sell offs in recent weeks that did not lead to follow-on losses on Wall Street. I think the problems in China are the same problems confronting other emerging economies, namely the fear of a Fed tightening cycle that would weaken U.S. demand, depress commodity prices while simultaneously sucking investment capital into the United States, and away from the emerging markets, as a result of higher domestic interest rates and the strengthening dollar.  

 

But if a temporary halt in rate hike rhetoric is not enough to stem the tide, a more definitive repudiation may be needed. Such an admission should finally open some eyes on Wall Street about the true nature of the economy and the unjustified strength of the U.S. dollar. That already may be happening. The dollar index closed at 95 on Friday...down from a high of 98 two weeks prior. On Monday, the index blew through the 93.50 support level and dropped more than 3% in just one day, down to intraday low of 92.6. Who knows where it stops now? 

 

Gold is rallying in the face of the crisis and has moved quickly back to $1,160, up around $80 in just two weeks. The bounce in gold must be causing extreme angst on Wall Street. Just two weeks ago, amid widening conviction that gold would fall below $1,000, it was revealed that hedge funds, for the first time, held net short positions on gold. Those trades are not working out. With the major currencies and gold now strengthening against the dollar, the greenback has had some success against far lesser rivals like the Thai baht and the Kazakhstan tenge. But these victories against currencies largely tied to commodities may be the last fights the dollar wins for a while, especially if Janet Yellen finally comes clean about the Fed's inherent dovishness. Those currencies now falling the farthest may be the biggest gainers if the Fed shelves rate increases. 

 

Some still cling to the belief that the Fed will deliver one or two token 25 basis point rate increase before year end. But this could expose the Fed to a bigger catastrophe than doing nothing at all. If it actually raises rates, and the crisis on Wall Street intensifies, further weakening an already slowing economy, the Fed would have to quickly reverse course and cut back to zero. This would put the Fed's cluelessness and impotency into very sharp focus. From its perspective anything is better than that. If it does nothing, and the economy continues to slow, ultimately "requiring" additional stimulus, it will at least appear that its caution was justified.

 

Unfortunately for the Fed, it won't be able to get away with doing nothing for too much longer. Events may soon force it to show its hand. Then perhaps some may notice that the Fed is holding absolutely nothing and has been bluffing the entire time.

Euro Pacific Capital/Peter Schiff/August 24, 2015

 

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China Stabilizes, Stocks and Bonds Sigh in Relief

Fears of a quick sharp devaluation of the Chinese yuan, disrupting the global economy, sparking a currency war, have eased. For the second session, the yuan stabilized.   The central reference rate (fix) was CNY6.3969, having finished the Shanghai session before the weekend at CNY6.3912.   The fix then was CNY6.3975.

While the oil downtrend is continuing today, bond prices are generally falling Curves are flattening as the long-end is down more than the short-end.  Most of the major 10-year benchmarks are off 2-3 bp today, while two year yields are most little changed (+/- 0.5 basis points).  With the hint over the weekend that Greece could qualify again for having its bonds accepted as collateral by the ECB has helped lift Greek bond yields that have fallen below 9% for the first time in six months.   We note that the officials have ruled out the bail-in of depositors, but not senior bondholders in the coming recapitalization of Greek banks.  Those bonds have fallen sharply today. 

Equities are mostly higher.  The Nikkei gained 0.5%.  Chinese shares are up about 0.7%.  The Shanghai Composite is just below 4000, and at its highest level since July 27.  Officials seem to have put in a bottom near 3500.  At 4500, some of the support fades.   Energy and financials were the two main sectors lower today.  

European bourses higher, with the FTSE being the main exception.  The Dow Jones Stoxx 600 is up about 0.2%, led by utilities and healthcare.  Telecom, materials and energy are drags.  The same sectoral performance is evident in the UK too. 

There have been two economic developments that have peppered the otherwise bland news stream.  First, Japan's GDP contracted by 1.6% at an annualized pace in Q2.  That is a 0.4% contraction on the quarter, a smidgen better than the 0.5% fall expected.  Yet private consumption and business spending fell more than expected.  Consumption slid 0.8%, twice the decline that the consensus expected and Q1 was revised to 0.3% from 0.4%.  Business spending edged lower by 0.1%.  The consensus has expected a flat report. It was revised to 2.8% from 2.7% in Q1.  Growth is expected to return to Japan in the current quarter.  The consensus is for 2.0% growth Q3 and Q4. 

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marctomarket.com / by Marc Chandler / August 17, 2015

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The Crisis Is Spreading: China, Australia, Brazil, Canada, Sweden...

Earlier today, we posted an excerpt from IceCap Asset Management's latest letter to investors focusing on the farce that is the Greek bailout #3, which can be summarized simply by the following table...

... and Keith Dicker's assessment which was that "for Greece, it’s mathematically impossible to repay its debt" and that the Greek "economy continues to plummet to deeper depths and is now -33% less than where it was in 2008."

But the truth is that for all the endless drama, Dicker continues, "the Greek debt crisis isn’t THE crisis. Rather it is simply a symptom of a much larger global debt crisis."

The problem is that the "larger global debt crisis" is finally metastasizing and spreading to more places, all of which are large enough that they can not be simply swept under the rug, like Greece.

* * *

IceCap's Keith Dicker continues:

We’ve written before that governments all around the world have borrowed too much money and the weight of these debts are choking economic growth.

And to make matters worse – these very same governments and their central banks have implemented various plans that have only made matters worse.

Our view has not changed – the global debt crisis has escalated to a point where the government bond bubble has inflated itself to become the mother of all bubbles. It’s going to burst, and when it does it wont be pretty.

Further evidence to support our view is as follows:

Canada – the collapse in oil and commodity markets has pushed the country into recession and the Canadian Dollar to decline to levels lower than that reached during the 2008 crisis.

Oil dependent provinces Alberta and Newfoundland remain in deep denial. Since everyone in these provinces have only ever experienced a booming oil market, many naively believe things will bounce back – and quickly.

Meanwhile, both Toronto and Vancouver housing markets also remain in denial as they continue to go gangbusters. Buyers today are likely buying at all-time highs.

And as we predicted last year, the Bank of Canada has cut (not raised) interest rates twice in the last 6 months.

We fully expect the Bank of Canada to eventually cut interest rates to 0% and start a money printing program as well. And for the stunner - NEGATIVE interest rates will not be that far behind.

Australia – Over the last 20 years, China has been viewed as the growth engine of the world, and justifiably so. With annual growth rates between 8% to 15%, China’s economy was literally eating every rock, stalk and barrel of practically every commodity in the world.

And naturally, any country or company that produced these commodities made a tonne of money – including Australia.

Today, China’s growth rate has slowed to about 3% which is a dramatic slow down compared to what it achieved in the past. This slowdown and China’s effort to even maintain these rates, will have significant repercussions around the world.

And the first up to bear the brunt of this slowdown is its closest supplier of raw materials – Australia.

With dark clouds on the economic horizon, the Australian government and central bank is doing everything possible to prevent the unpreventable recession.

Interest rates have been reduced to all-time historical lows, meanwhile the Australian Dollar has plummeted -25% over the last year. Yet – the negative outlook has not improved.

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zerohedge.com/Tyler Durden/August 15, 2015

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Why China Devalued the Yuan

Taking a look at this chart of the Dollar/Yuan exchange rate, you can understand why the Chinese government took the action that it did. The chart is denominated in yuan to dollars. The more yuan per dollar, the weaker the yuan and the stronger the dollar; the fewer yuan per dollar, the stronger the yuan and the weaker the dollar. You can see that the yuan has been continuously strengthening over the past ten years. Remember that as a currency strengthens, exports from that country become more expensive. A good that cost 100 yuan back in 2005 would mean a dollar cost of a little over $12. A 100-yuan good today would cost over $16. That’s why the Chinese government originally tried to keep the yuan pegged to the dollar, so as not to make the exports it relied upon for economic growth more expensive abroad. But after much pressure from the US and other Western countries, the government depegged the yuan, allowing it to trade in a narrow band and appreciate against the dollar.

Remember the dynamic that was going on, too. Chinese firms would export to the United States. US importers would pay Chinese firms in dollars. Those dollars would come back to China, where the exporters wanted to change them into yuan. Now what to do with all those dollars? Well, the Chinese government used them to purchase US Treasury bonds. Of course, the US wanted to take advantage of this, so the Federal Reserve created even more money out of thin air, increasing the money supply, with more and more of those dollars going overseas to purchase Chinese goods. And then the Chinese government would soak up more of the US government’s debt. Cheap goods and our debt is covered? That’s a win-win in any government’s book.

Take a look at the chart of the M2 money supply, the broadest money supply measure the Fed still publishes.

As the M2 money supply increases (devaluing the dollar), it seems that the yuan strengthens against the dollar. If you look at the actual data behind these charts, there’s a -0.91 correlation between M2 and the yuan/dollar exchange rate over the past 10 years. If you strip out the new pegging period from mid-2008 to mid-2010, there’s a -0.96 correlation from mid-2005 to mid-2008, and a -0.85 correlation from mid-2010 to today, which rises again to -0.96 if you remove the data from the interventionist period beginning in early 2014. Yes, correlation doesn’t equal causation, but these numbers aren’t mere coincidence. The US government wanted to take full advantage of the dollar’s position as the world’s reserve currency, exporting dollars to China in exchange for cheap consumer goods, while simultaneously making US exports of capital-intensive goods to China cheaper.

Any American reactions to China’s devaluation moves must be seen as hypocritical. Just as the US government took advantage of the Bretton Woods system to print more dollars than it had gold, it has engaged in a similar beggar-thy-neighbor policy with respect to China, exporting devaluing dollars to China in exchange for Chinese-made goods. It is perfectly understandable that China would rather not have its monetary policy guided by decisions made in Washington. All the hand-wringing in Washington is just for show. American politicians wanted to enjoy the benefits of inflation, getting something for nothing, and they don’t want it to stop. So they try to paint China as the bad guy for reacting to loose American monetary policy. It goes without saying that none of this would be an issue if we could just get government out of the money creation business. But that’s a story for another day.

Via the Carl Menger Center./Paul-Martin Foss/ August 13. 2015

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Global Markets Turmoil After China Extends Currency War To 2nd Day - Devalues Yuan To 4 Year Lows

Chinese stocks opened lower, extending yesterday's losses, after The PBOC weakened its Yuan FIX dramatically for the 2nd consecutive day (from 6.1162 Monday to 6.2298 last night to 6.3306). Offshore Yuan fell another 9 handles against the USD after China closed but was hovering at 6.40 as the market opens (now at 11 hnadles weaker at 6.51). Bear in mind the utter devastation in Chinese credit markets that data showed occurred in July, it remains ironic that for the 3rd days in a row, Chinese margin debt balances grew. Before the real fun and games started, Chinese officials once again exclaimed that their data is real (denying any mismatches between GDP Deflator and CPI) as China CDS spiked to 2 year highs. US equity futures are tumbling, bonds bid, and gold bouncing off the initial jerk lower.

PBOC makes some comments (like last night's)...

• *PBOC SAYS NO ECONOMIC BASIS FOR YUAN'S CONSTANT DEVALUATION
• *PBOC SAYS YUAN WON'T CONTINUOUSLY DEVALUE
• *PBOC SAYS MOVE OF YUAN REFERENCE PRICE IS NORMAL
• *CHINA YUAN MECHANISM CHANGE MAKES FIXING RATES MORE REASONABLE

The "one-off" adjustment has now become two... some context for the size of this move...

• *MNI: CHINA PBOC WED YUAN FIXING LOWEST SINCE OCT 11, 2012

Onshore Yuan breaks above 6.41 - trades to 4 years lows against the USD...

US markets are reacting dramatically...

US Treasury yields are collapsing...

Offshore Yuan is collapsing...

• *CHINA SETS YUAN REFERENCE RATE AT 6.3306 AGAINST U.S. DOLLAR
• *OFFSHORE YUAN TUMBLES 1.6% AFTER PBOC SETS FIXING LOWER

War is begun... (via Ransquawk)

Offshore Yuan has been leaking lower since China closed...

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zerohedge.com/Tyler Durden/August 11, 2015

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From Currency Wars To Oil Wars - OPEC Ups Production To 3 Year Highs As Iran Output Surges

As China takes the currency wars to the next level, so OPEC, not to be outdone, rotates the oil war volume to 11. As Bloomberg reports, OPEC pumped the most crude last month in more than three years as Iran restored output to the highest level since international sanctions were strengthened in 2012. The response - as one would expect - is a plunge in crude prices, erasing all the ridiculous algo-driven gains of yesterday, pushing WTI back on the verge of a $42 handle.
As Bloomberg reports,

The Organization of Petroleum Exporting Countries, responsible for 40 percent of world oil supplies, raised output by 100,700 barrels a day to 31.5 million last month, the group said in its monthly market report, citing external sources. This increase came even as Saudi Arabia, which often curbs output toward the end of peak summer demand, told OPEC it cut production by the most in almost a year.



Iran may further expand output after reaching an accord with world powers on July 14 that will ease sanctions on oil exports later this year in return for curbs on its nuclear activity.

“Iran has been rising slowly but surely for a while now,” Abhishek Deshpande, an analyst at Natixis SA in London, said by e-mail. “It doesn’t need foreign investment to revamp existing infrastructure and prepare fields, resulting in the small increases you can see now. But the bulk of the increase is expected once it becomes clear sanctions will definitely be lifted.”

Iran increased output by 32,300 barrels a day in July to 2.86 million a day, the highest since June 2012, according to data OPEC compiles from “secondary sources” such as media agencies and international institutions. Sanctions to deter the nation’s nuclear research took effect in July that year.

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zerohedge.com/Tyler Durden/ August 11, 2015

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China "Loses Battle Over Yuan", And Now The Global Currency War Begins

Almost exactly seven months ago, on January 15, the Swiss National Bank shocked the worldwhen it admitted defeat in a long-standing war to keep the Swiss Franc artificially weak, and after a desperate 3 year-long gamble, which included loading up the SNB's balance sheet with enough EUR-denominated garbage to almost equal the Swiss GDP, it finally gave up and on one cold, shocking January morning the EURCHF imploded, crushing countless carry-trade surfers.

Fast forward to the morning of August 11 when in a virtually identical stunner, the PBOC itself admitted defeat in the currency battle, only unlike the SNB, the Chinese central bank had struggled to keep the Yuan propped up, at the cost of nearly $1 billion in daily foreign reserve outflows, which as this website noted first months ago, also included the dumping of a record amount of US government treasurys. 

And with global trade crashing, Chinese exports tumbling, and China having nothing to show for its USD peg besides a propped and manipulated stock "market" which has become the laughing stock around the globe, at the cost of even more reserve outflows, it no longer made any sense for China to avoid the currency wars and so, first thing this morning China admitted that, as Market News summarized, the "PBOC lost Battle Over Yuan."

That's only part of the story though, because as MNI also adds, the real, global currency war is only just starting.

And now that China is openly exporting deflation, and is eager to risk massive capital outflows, the global currency war just entered its final phase, one where the global race to the bottom is every central bank's stated goal. Well, except for one: the Federal Reserve. We give Yellen a few months (especially if she indeed does hike rates) before the US too is back to ZIRP, maybe NIRP and certainly monetizing even more things that are not nailed down.

Here are some additional views from Market News that summarize what just happened in China:

China PBOC Loses Battle Over Yuan; War Continues

The People's Bank of China said Tuesday that the yuan will from now on better reflect market forces, but the central bank is unlikely to tolerate sustained depreciation so long as it feels it needs to maintain financial stability and avoid spooking capital flows.

The near-2% depreciation engineered via the central parity fixing on Tuesday was described by the PBOC as a "one-off revision." The yuan's real effective exchange rate has risen nearly 15% over the past year and the central bank said it wanted to correct this deviation. Tuesday's depreciation was presented as a reform step designed to improve the central parity fixing mechanism.

But the fixing rate, and the bank's explanation, rocked regional markets as investors sold off on concerns that China will now competitively devalue the yuan to help prop up its flagging economy. Domestic asset prices also weakened because a weaker yuan risks worsening capital outflows, leading to tighter onshore monetary conditions and possibly destabilizing the financial system.

A person familiar with exchange rate policy accepted that the move increases depreciation speculation but said the authority will continue to stabilize the yuan.

"The yuan may keep falling as the market needs time to understand but the central bank will keep the exchange rate stable because it is in China's interest to do so," he said.

Another person stressed the market reforms imbedded in Tuesday's statement and said "we cannot simply understand the yuan central parity from this depreciation angle." Tuesday's announcement comes ahead of an International Monetary Fund decision later this year on whether to include the yuan in the basket used to value its Special Drawing Right.

Traders in the interbank market noted big dollar sales by large institutions at around 6.3000 on Tuesday morning and suggested these banks could be acting on the quiet orders of the PBOC.

"It's the PBOC's invisible hand -- it looks like this is the first line of defense now," said a trader with one of the Big Four state banks. Another trader said the PBOC may step up intervention for now, but said the longer-term outlook is for a more market-oriented -- and presumably weaker -- yuan.

The central bank has kept the yuan stable for months in a quiet peg to the U.S. dollar precisely because of its concerns about capital flows and the need to maintain financial system stability.

It has faced mounting pressure from within the bureaucracy to allow the yuan to weaken to help support the export sector, MNI reported last week. July's dismal trade report -- showing an 8.3% y/y plunge in exports -- made the PBOC's ongoing resistance to depreciation untenable.

The new method for fixing the morning central parity rate does promise greater input from market forces. The PBOC instructed market makers that their central parity quotes "should refer to the closing rate of the inter-bank foreign exchange market on the previous day, in conjunction with demand and supply condition in the foreign exchange market and exchange rate movements of the major currencies."

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zerohedge.com/Tyler Durden/August 11, 2015

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China Enters Currency War - Devalues Yuan By Most On Record

Chinese stocks are holding on to modest losses in the pre-open as, just as we have been warning, the PBOC weakens the Yuan fix by the most on record.

As we first warned in March, and as became abundantly clear over the weekend when weaker than expected export data as well as the steepest decline in factory gate prices in six years underscored the extent to which the engine of global growth and trade has officially stalled, Beijing has no choice but to join the global currency wars, as the yuan's dollar peg will ultimately prove to be too painful going forward. The renminbi has appreciated on a REER basis by double digits over the past 12 months, weighing heavily on already depressed exports. With multiple policy rate cuts having proven to be largely ineffective at resurrecting the flagging economy, the PBoC, despite the notion that this represents a "one-off"move, has been left with little choice. The bottom line: the danger posed by the country's deepening economic slump now definitively outweighs the risk of accelerating capital outflows - especially after the latter moderated slightly in Q2.

As we noted over the weekend, "one can repeat that the PBOC will have to lower rates again until one is blue in the face (even as out of control soaring pork prices make it virtually impossible for the local authorities to ease any more), the realty is that Chinese QE is now inevitable. Why? Because while the government is already clearly buying stocks thereby validating the "other" transmission mechanism, the only thing the PBOC still hasn't tried is to devalue the yuan. As global trade continues to disintegrate, and as a desperate China finally joins the global currency war, it will have no choice but to devalued next."
Recall also what SocGen's Albert Edwards said some five months ago: 

We have long believed that China's growth and deflation problems will necessitate a devaluation of the renminbi in a strong dollar environment. There is mounting evidence that this process may already be underway as the currency falls to a 28-month low against the dollar…

In the current deflationary environment the Chinese authorities simply can no longer tolerate the continued appreciation of their real exchange rate caused by the dollar link. 

The 1.9% devaluation sends the Yuan to its weakest since April 2013. Gold is leaking lower as the offshore Renminbi collapses by the most since Oct 2011.
PBOC weakens Yuan fix by 1.9% - the most ever...




Offshore Renminbi is plunging..

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zerohedge.com/Tyler Durden/August 10, 2015

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China And Deflation: This worse-than-expected slump in exports is probably even worse than admitted

China’s July exports slump 8 percent, raises pressure for more stimulus
Aug 8, 2015
BEIJING/SHANGHAI (Reuters) – Chinese exports tumbled 8.3 percent in July, their biggest drop in four months and far worse than expected, reinforcing expectations that Beijing will be forced to roll out more stimulus to support the world’s second-largest economy.
Imports also fell heavily from a year earlier, in line with market forecasts but suggesting domestic demand might be too feeble to offset the weaker global demand for China’s exports.
Economists had forecast exports to fall just 1 percent, after a 2.8 percent uptick in June, but the data on Saturday showed depressed demand from Europe and the first drop in exports to the United States, China’s biggest market, since March.

This data confirms the idea of a pronounced slow down not only in China’s economy but Europe’s and the US as well.
No matter how much stimulus the Chinese authorities apply it’s going to be hard to change any of these import and export statistics by any other means than by massively devaluing the yuan.
Here’s a bit of data that suggest Australia is feeling the pinch:

Port Hedland iron ore exports slip in July
Aug 6, 2015
Iron-ore exports from Australia’s Port Hedland fell by 8.8 per cent in July compared to the previous month, the local port authority said on Thursday. Iron-ore shipments for the month totalled 35 million metric tons, down from the all-time high shipments of 38.4 million tons in June. The port’s July total was also a decrease of 775,000 tons, or 2 per cent, from the same month in 2014, it said.

Notice that the statistics above are given in tons, but the Australian dollar has fallen by a lot over the past year, so measuring the economic impact would reveal a much steeper decline than the tonnage suggests.
Because the yuan is pegged to the dollar, this is a fair representation of the impact.

image: http://www.peakprosperity.com/sites/default/files/users/u4/aud_to_usd_2015-08-08_10-31-03.jpg

ouch!
Less tonnage and a vastly lower AUD = a big economic impact.

Chris

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investmentwatchblog.com / by IWB, on August 9th, 2015

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