Watching The Yuan

The recent surge in the US dollar has again brought massive selling in the emerging market currencies, most notably the Chinese yuan. This has occurred twice before in the past 15 months and each prior instance has foreshadowed a 10% drop in the S&P 500. Therefore, are we on the verge of another stock market correction?

We've been alluding to this in the podcasts of late and I've been meaning to write about it with some illustrative charts. However, the metals have been so volatile that I haven't had the opportunity. Today, with both gold and silver mostly flat on the session, I thought I'd seize the moment.

The problem for the Chinese is that the yuan is pegged to the US dollar. So, when the dollar strengthens...as it has for the past 60 days or so...the yuan strengthens, as well. The PBoC doesn't like this very much as it makes their exports more "expensive". It also creates a whole host of other issues, many of which are summed up in this excellent article I found at ZH last evening:

So, anyway, it's the ripple effect of the Chinese yuan devaluation that has my interest. First of all, here's a chart USDCNY chart that covers the last five years. Just like when the Japanese yen is portrayed by the USDJPY, a rising USDCNY means that the yuan is getting weaker versus the US dollar. Note that, even with the "peg" in place, the yuan has weakened by over 10% in the past three years.

Now let's drill in a little closer so that you can see where we're headed with this. On this weekly chart of the USDCNY, you can see four, specific periods of PBoC action to weaken the yuan in response to a surging dollar.

  • A 3% devaluation in week of August 9, 2015
  • A 3% devaluation between late November 2015 and early January 2016
  • A 2% devaluation in June of 2016
  • This current 2.7% devaluation that began the week of October 9

OK, so this is where it gets interesting. Check this weekly chart of the S&P 500. Be sure to note:

  • the 10% decline in mid-late August of 2015
  • the 10% drop in early January of this year
  • the 5% drop in June of this year

As you can see, there is a distinct, lagging correlation between devaluations in the yuan and corrections in the S&P. Perhaps, since the S&P was falling sharply before the US election, this yuan-related correction has already occurred?  Perhaps the huge rally in stocks over the past five days will preclude any further decline? Perhaps.

However, if history is any guide, a soaring US dollar seems to put extreme stress on China and all emerging market currencies. In the past, this has led to liquidity shortages which have eventually bled into the US stock market. And the PBoC doesn't appear to be finished with this latest round of yuan devaluation. Below are the changes over just the past few days and check this new "warning" about all of this from the BIS: http://www.zerohedge.com/news/2016-11-15/vix-dead-according-bis-new-fear-indicator

Finally, as this site is dedicated to the precious metals and gold is often well-bid as a "safe haven" during periods of stock market selloffs, check this one last chart. Be sure to note the timing of the surges in the paper derivative gold price and note how they neatly coincide with the weakening yuan and falling equity markets.

With stock market bullishness at extreme levels and the gold permabears out in force, a sharp rally in gold from here would certainly catch almost everyone by surprise. So, could a rally be coming on the days ahead? Perhaps you should just keep your eyes focused upon the yuan. It may once again be foreshadowing what is to come next.

Just something to consider on what is otherwise an uneventful Tuesday.

TF

www.tfmetalsreport.com/subscribe

64 Comments

OOOBuck's picture

Where is everyone.

1st?????

Swift Boat Vet's picture

First?

Am I for the first time first?

Swifty

Ya beat me by THAT much!

RickshawETF's picture

Bronze . . .

Thurd.  Shoulda been zinc!

And now, Marchas?

forever20's picture

4 - liking the theory/analysis TURD, muchas gracias

taken marchas spot........ Silver is my friend, physical is a beautiful thing

JQuest's picture

5

!!!laugh

Marchas45's picture

Darn It 5th Ok 6th

Late Again. Out making some fiat for the Physical. Keep Stacking

JQuest's picture

$1,225 for 14 hours...

Capity Cap cap...

Update: Still Capped 11:45

canary's picture

Question

My doggies walking friend tells me that he has a solution for the federal debt ($20 trillion). He wants to tax the rich people to their death, and pay off the country's debt. I'm not buying it, sounds too populistic (though I'd like to rob them myselfsmiley).....But for the sake of argument, how much money the reach people have?...Would that be enough to pay off the debt???     By being rich, I mean million and up of income.

CONSTANTINE's picture

Obama's Tie Color

Take note of the tie color chosen by Obama for his speech to the Greeks this morning.  Story on Zerohedge.

CONSTANTINE

TF Metals fan's picture

Miners

Miners are doing nice today. Would fit into Turds scenario. Although debated there has been seen a forecasting ability for PM in general. Fingers crossed. 

EchoSpace's picture

Back to Basics

US Dollar: What goes up must come down.
Gold & Silver: Yeah, it's about time!

Boxingbuddha's picture

lucky 7?

Lucky 7?

Turd Ferguson's picture

Don't want to put too much empahsis on this...

MODERATOR

...as it changes day-to-day and it doesn't appear to be at a sustained and deepening level to prompt significant arbitrage...

BUT

This gap continues and I don't think that the SGE has yet to fix below $18 in silver during this latest price smash.

Golden Turtle's picture

A presidency that will focus on US first leads to a strong dolla

I wouldn't be suprised if if we saw a full depegging of the yuan from the dollar. Could come in days... Metal bloodbath.

Turd Ferguson's picture

Not so fast, my friend

MODERATOR

A depeg and major devaluation would send ALL "markets" reeling, so much so that you'd likely see a very quick turnaround in gold.

Maestro's picture

Excellent Analysis Craig

My brain actually hurts from thinking about all of this and reading as much as I can over the last week.  In the end however, if I can't wrap my head around things, if I don't understand the "new" rules of the game, then I leave the table.  Right now...I don't understand.   How does that saying goes...."If you don't know who the fool at the table is, then...?"

Best I can hazard a guess is severe stagflation in the future.  I am glad that Hitlery did not win, BUT by no means think Trump offers any hope in hell of unravelling the great Keynesian experiment.    There will be grand pronouncements no doubt, but the variables of this economic rubics cube boggle the mind.  Leaves even a seasoned trader of 20 years nauseous.   The temptation is always to miss the next run.  

As you mentioned...I am watching the yuan in awe.....there will be hell to pay in emerging markets, but for now the U.S. markets are in denial.

I am reminded of a game of musical chairs......just make sure you have a chair when the music stops.

Robertoe's picture

Typo

Turd there is a typo in your bullet point - decimal place missing! 2.7% - currently reads:

  • This current 27% devaluation that began the week of October 9
lakedweller2's picture

@TF

Great observations on Happy Tuesday!

Turd Ferguson's picture

Thanks!

MODERATOR

Thanks!

Response to: Typo
Dirt_Reynolds's picture

CONSTANTINE

Note John Oliver's shirt color:

Yes, they are that dumb.

#keepstacking

Angry Chef's picture

Batchelor and Cohen Fodder

US, British ‘Clean House’ to Delete Syria Terror Links

They probably won't talk about this but it appears "WE" need to clean house. Otherwise we may be subject to War Crimes and Reparations. Those are my thoughts not the authour.

Turd Ferguson's picture

to your point

MODERATOR

SilverBelle's picture

Dalio's thoughts on Trump

Dr Jerome's picture

Prepperville, AZ

There is an area about 30 miles  outside my town where all the preppers have built fortresses. As I consider the end of the Great Keynesian experiment, I just cannot see moving to a location like this. My wife's close friend bought 40 acres with a house here two years ago. We helped her get set up with solar electric power and got the broken pipes fixed so her water system would function. But she was lonely out there--even with 4 dogs. Her nearest neighbor was a half mile away. No "snowflakes" out here, though a bit of snow falls each winter.

Just this month, she sold the house for double the price and bought a foreclosed home on the outskirts of town. I think there is wisdom in living close to neighbors--inasmuch as you can trust them.

The views here are amazing at any time of the day. This pic was shot about 9am yesterday.  You can see about three compounds, on parcels that vary from 40 to 160 acres. If I had to go visit someone, I think I'd carry a white flag before walking up to their front door.

But this area is so dry. The dirt wil not support a garden, though you could buy a trailer full of good soil for $15 at the sand & gravel yard. There are usually antelope all around, but our friend has not seen any since last year. Maybe someone started poaching? Water has to be hauled. There is a community well on the main road. It is very windy, and cold, with little rain or snow. Life is possible, but not easy.

I want to retire soon and have a place where my wife and I can survive on our vegetable garden, supplemented by chickens and rabbits. I am becoming more sold on moving to good farmland, in a community with other committed neighbors who will tend to have one another's backs, rather than people out here that you never meet, in a land where scratching out a living is very, very challenging.

I like green--the color of life.

Soon, all this prepping, stacking and trading will end. I am thankful for Trumps victory. I trust that if nothing else comes of it, he will at least buy some time for us to keep preparing for this revolution.

Golden Turtle's picture

The metals and @Jerome

The metals just look and feel weak to me at the moment. Like you said, this is a new paradigm. I think we have to completely rethink metals in this new light.  

I think you are right Jerome. Who wants to live in fear their whole life preparing for the worst? One day, the true transition will be prepping for the best :)

Markedtofuture's picture

Meet Dr. Judy Shelton, Trump's economic advisor, fan of Ron Paul

Apparently she's been Trump's economic advisor for some time now and is second to Larry Kudlow, in Trump world.

She tends to use terms like; Constitutional scholars, sound money, gold standard, founding fathers.

--------------------------------------------

Posted November 15th, 2016 at 11:11 AM (CST) by Bill Holter & filed under Bill Holter.

Dear CIGAs,

As we spoke of in our last interview and my last article, “meet Judy Shelton”.  Please read the following as Ms. Shelton appears to be part of the Trump administration.  Could she be senior economic advisor, or even Fed chair?  Who knows but she is a sound money advocate and has her head screwed on correctly.  If you do not know of her now, I believe you soon will!

Bill

http://www.jsmineset.com/2016/11/15/meet-judy-shelton/

tommy's picture

The beginning of the Keynesian experiment

We're all waiting for the end, but does anybody know where it actually started?

The Oligarchs’ Plan to Monetize Humanity – Stewart Dougherty

We believe the Indian currency reset is a test, foisted upon a compliant, disarmed people to gauge their reaction. The real drama is yet to come, and will occur throughout the West. If the oligarchs cannot trick the people into accepting the elimination of cash, then they will do the next best thing: a for-profit currency reset that nets a windfall. Most likely, they will do both, in succession: a currency reset, netting a windfall, followed by the elimination of cash, netting a second, much larger windfall.

I thought this was a interesting article, maybe a little farfetched, but this part struck me like a brick. Do you know where they first tested fiat currency?

https://www.bol.com/nl/p/indian-currency-and-finance/1001004003024598/

During my research I found out that fiat currency was first introduced in India on a people that thought it was gold backed. In this book written in 1913, predating his treatise on money,   Keynes explains(he worked for the Indian Office)  how the use of fiat currency could work, but it was important to let the people in the dark because their primitive minds would clamor for the barbaric relics, which were obviously obsolete. I had never seen this book cover before though. Are the Indians used as guinea pigs again?

billhilly's picture

@Maestro

Well stated Sir.  You have written the same things I have been considering this past week especially.

I have been trying to get my head around a rising USD and falling Treasuries (price).  This just seems so wrong to me and is bucking the trends over the past 8 years anyway.  And with the rising USD comes falling Gold.  Does this mean when the treasury bubble burst's we get slaughtered in Gold ??? 

Like I said yesterday, the pieces of the puzzle just don't seem to fit together where a coherent/clear picture can be seen. 

Maybe EVERYBODY is confused.  And if this is true, then let me/us get the hell out of the way cause nobody wants to be in the wrong place during a stampede.

Angry Chef's picture

Why Most of the U.S. Deep State Dumped Hillary: A Saker........

.....Interview with the Solari Report's Catherine Austin Fitts

https://www.roguemoney.net/stories/2016/11/2/deep-state-dumps-hillary-saker-caf-solari

Somebody should share this with Soros and the rest of the neo-con's as well as all the "snowflakes". Be happy with what you got. It ain't perfect but it's a helluva lot better than dying.

And I don't agree Golden Turtle. The fiscal and monetary problems that face not just the USA but the World are still there. Nothing has changed in that respect. It will take at least a decade to get back to any kind of significant grassroots growth. The best solution would be to have some kind of a debt jubilee. But that is likely to come after everything else fails. We're not wrong for stacking and nobody was wrong for prepping. And best of all. We're not going to die so lets get out there and get the Neo-Cons, Soros and Snowflake clan and thank-God we got a 2nd chance....

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