Is it all part of a cunning plan ? Boringly, probably not .......

Tuesday 3rd November 2015

Is it all part of a cunning plan ? Boringly, probably not .......

 Ref : "Quick Yuan Slide After IMF Is Conspiracy Theory, JP Morgan Says", Bloomberg Markets

Whether they revolve around faked moon landings, UFOs or presidential assassinations, there's never any shortage of conspiracy theories. The one doing the rounds in financial markets at the moment might be a lot more mundane in terms of subject matter (how could it not be ?) but has a few high-profile supporters, and not just in the protectionist lobby of the US Congress.

It's been suggested that the Chinese authorities are doing everything required of them in order to see the Yuan adopted by the International Monetary Fund as one of its reserve currencies  --  the IMF will decide later this month  --  but will let the value of the currency tumble once that goal has been achieved.

China has been told by the IMF that it can expect the Yuan to be granted reserve status "soon", and a good many judges reckon that it will happen this year. But the move is conditional on China continuing to remove capital controls and in particular to liberalise its exchange-rate regime and foster transparent two-way trade.

According to positions recorded in options markets, the chances of China engineering a post-acceptance slide in the currency are receding despite the competitive advantages of a weaker Yuan. Besides, to do so would be self-defeating, argues Zhu Haibin of JP Morgan. If China was to start a new round of devaluations it would unleash a wave of high volatility that would have such damaging effects on both markets and the economy as to completely outweigh any boost to exports provided by a cheaper currency. Judging from what happened in August, you'd have to say he has a point.

The proof of the pudding will be in the eating, of course. If China's growth turns out to be as far below official forecasts as some suggest, natural currency weakness might mean that attention will be on how resolute the authorities are in its defence, rather than searching for evidence of encouraging downward moves. 

Please, can you all sing from the same hymn sheet ?

Ref ; "Fed's Big Three Expected to Reinforce December as Lift-off Option" , Bloomberg Markets

Just a note to point out that the three head honchos at the Federal Reserve are all speaking tomorrow. Fed Chair Janet Yellen testifies before the House Financial Services Committee (which is free to quiz her on any subject) at 10.00 ET, New York Fed President holds a press conference at 14.30 ET, and Fed Vice Chairman Stanley Fischer speaks in Washington at about 19.30 ET.

Given the tone of the Fed's statement after the October FOMC meeting, we can expect them to re-affirm that December is a viable option for the first rate-hike. At the very least, we should be expecting them to say roughly the same thing.

The Fed has been under fire over its communication skills, or lack of them. We know that it's not easy .... as circumstances change, so does the preferred course of action. But contradictory statements from various members of the Fed with diverging views has only served to add to confusion and volatility. We know of course that there is spread of opinion at the Fed ranging from the hawkish, through the centre to the doveish but now would NOT be the time for its three most important officers to speak with more than one voice.

The world will be listening ......