Yuan inclusion in SDR and impact on USD | Forex Factory

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Yuan inclusion in SDR and impact on USD

  • #1
  • First Post: Oct 16, 2015 12:44pm Oct 16, 2015 12:44pm
Just curious if this is on anyone's radar. IMF should be announcing a decision soon. Potential for major USD sell off as value flows to the yuan. Thought it was worth a comment since it likely will be a financial earthquake when it happens (not if). Could be inflationary as in the 70's dollar crash. Might give the Fed room to hike? I certainly don't pretend to understand the implications, but in the short term, USD shorts might make since. Continued USD strength if (as with the FED) the IMF fails to launch. Thanks for your input.
Yeoman the "Tough Luck" Trader =p
  • #2
  • Oct 19, 2015 11:44am Oct 19, 2015 11:44am
Guess I have my answer....not on anyone's radar here at FF. The CHF wasn't on anybody's radar either back in January...was it?
Yeoman the "Tough Luck" Trader =p
  • #3
  • Oct 20, 2015 3:55am Oct 20, 2015 3:55am
Quoting Yeoman
Guess I have my answer....not on anyone's radar here at FF. The CHF wasn't on anybody's radar either back in January...was it?
Interesting question... but I don't think we'll see any major fireworks either way, because:

1) The renminbi is already traded widely (3rd largest on EBS), so portfolio managers wanting to use it as a reserve already are

2) The SDR isn't that widely used - FT had a good article on it, less than 4% of non-gold reserves held by govs are SDRs http://www.ft.com/cms/s/3/e1a337d6-0...#axzz3p3BUJyMb

It's massive in the long run - part of China's liberalisation project, but it seems more symbolic than material at this stage. Also, in regards to the decision - nov 4th - although China are extending trading hours, they're still pegging the currency so I don't see how they could be accepted into the SDR given one of the prerequisites was for free-floating exchange. Unless ... unless they're doing backroom deals and announce unpegging at the same time as the 'decision'.
  • #4
  • Oct 20, 2015 11:08am Oct 20, 2015 11:08am
Thanks for the reply triphop. I couldn't access the article you posted...members only...

All reading I've found pretty much says "they ain't gettin' in....yet" But it's also clear that they want in pretty bad, so I'm sure the back room negotiations are hot-n-heavy. The PBOC have no small amount of economic weight and leverage so a surprise announcement won't really surprise me. And that's the point of trying to have the conversation...ie. CHF peg. The vast majority of markets are always going to get caught with their pants down.

"Call for more capital account convertibility before yuan joins IMF’s SDR currency basket
International Monetary Fund will meet in November to vote on whether mainland currency can join next year"
http://www.scmp.com/business/banking...uan-joins-imfs
Yeoman the "Tough Luck" Trader =p
  • #5
  • Oct 21, 2015 8:55am Oct 21, 2015 8:55am
Not wrong there.

I took a look last night at the impact of previous devaluation (chart shows eu, ucny, eurcny, gbpcny). The effect on other currencies was minimal but there were some strong clues to a long UCNY position before it happened.
EU top (first vertical) and EU bottom (second) shows the range they were looking at. Once UCNY price returns back to the same level, decision was made to devalue.
But they bought a load of dollars first, kept in a v. tight range before letting it go.

Japanese retail totally cleaned up on this.
http://www.bloomberg.com/news/articl...n-trader-crowd

If a deal is being struck, a further devaluation would v. likely be on the cards, so a long to the previous big intervention level, 6.8 would a good call.
Going to return to this before the 4th...
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  • #6
  • Oct 22, 2015 9:01am Oct 22, 2015 9:01am
Quoting Yeoman
Thanks for the reply triphop. I couldn't access the article you posted...members only... All reading I've found pretty much says "they ain't gettin' in....yet" But it's also clear that they want in pretty bad, so I'm sure the back room negotiations are hot-n-heavy. The PBOC have no small amount of economic weight and leverage so a surprise announcement won't really surprise me. And that's the point of trying to have the conversation...ie. CHF peg. The vast majority of markets are always going to get caught with their pants down....
Take the article title from FT, copy it to google - the link you it gives you passes by the paywall and you can read the article. Same with WSJ
  • #7
  • Oct 22, 2015 9:44pm Oct 22, 2015 9:44pm
Quoting Yeoman
Just curious if this is on anyone's radar. IMF should be announcing a decision soon. Potential for major USD sell off as value flows to the yuan. Thought it was worth a comment since it likely will be a financial earthquake when it happens (not if). Could be inflationary as in the 70's dollar crash. Might give the Fed room to hike? I certainly don't pretend to understand the implications, but in the short term, USD shorts might make since. Continued USD strength if (as with the FED) the IMF fails to launch. Thanks for your input.

Great Question. I've been following the fudamentals for China's economy for quite sometime, done my research, posted an article about shorting the Shanghai Stock Composite right before its inevitable crash pinpointing to 4841 back in June, so I think I may have few words to say about this particular currency. (Nah, Just me rambling about)

All currency pairs are quoted in, "Pairs", so let's try to analyse RMB in some act/counteract scenarios against USD, shall we?

Scenario A
Black Swan Level-Low
RMB succesfully included in SDR →
Market Demand for RMB rises(Short Term), but not enough to change the long term lookout of China's Slowing Down (Research Keyword_China Slow Down) →
Temporary plunge on USD/CNY(CNH) →
Market Participants still waiting for feds rate hike →
temporary upset on US Stock Market
Action A
Short DJ30

Scenario B
Black Swan Level-High
RMB succesfully included in SDR →
Market Demand for RMB rises(Short Term), but not enough to change the long term lookout of China's Slowing Down →
The Big Boys are expecting you that you are expecting to short USD/RMB, they would unload all their inventories to you, thus RMB included in SDR will not help USD/RMB to rise, but quite the contrary, it will create sellout opportunity in RMB thus driving up USD/RMB (Research Keyword_China Capital Outflow)
→
Rise on USD/CNY(CNH), possibly long term →
Market Participants still waiting for feds rate hike →
Temporary Rise in Gold, VIX, possible catalyst for USD long Round II

Action B
Buy VIX, Buy Gold, Buy usd basket with minimum leverage for the long run.


Scenario C
Black Swan Level-Low
RMB succesfully included in SDR →
Market Demand for RMB rises(Short Term), not enough to change the long term lookout of China's Slowing Down, but enough for traders to think that the long term lookout for China is positive (Really? I'd admit I could find any convincing evidence on postive lookout, if anybody did find something, plz point me to the right direction coz' I'm desperate for counter-evidence) →
Temporary plunge on USD/CNY(CNH) → Market Participants still waiting for feds rate hike →
Rise on USD/CNY short to mid term, but not necessiarily on longer time horizon →
temporary upset on US Stock Market
Action C
Short DJ30

Scenario D
Black Swan Level- Ultra High
RMB succesfully included in SDR →
Market Demand for RMB rises(Short Term), not enough to change the long term lookout of China's Slowing Down, but enough for USD bears to use it as a leverage to drive USD down, both short & long term. (US economy is not exactly full of flowers & bunnies you know) →
MASSIVE GLOBAL MELTDOWN (Dare to screw with USD? Well where else in the bloody world can you hid your money?) →
Feds announce immediate rate hike up to 500 basis point to 2000 basis point, following the footsteps of Russia →
Not gonna do a damn thing, capital outfolows are out of control →
USD/CNY Plunge unprecedented, USD quoted comodities rise unprecedented, gold up unprecedented, VIX up unprecedent, you get the idea.

Action D
Move to Mars...I mean, park your money on gold, lite coin, GBP (personal opinion)

My followup question to you guys?

Should global financial meltdown ever happened, where would be the safest places(assets?) to park your $$?

f
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No Highs? No Lows? Must be Bose!
  • #8
  • Oct 24, 2015 8:27am Oct 24, 2015 8:27am
Quoting timestamp
{quote} Take the article title from FT, copy it to google - the link you it gives you passes by the paywall and you can read the article. Same with WSJ

Thanks
Yeoman the "Tough Luck" Trader =p
  • #9
  • Oct 24, 2015 8:57am Oct 24, 2015 8:57am
Quoting Tardigrade
{quote}All currency pairs are quoted in, "Pairs", so let's try to analyse RMB in some act/counteract scenarios against USD, shall we?
Really appreciate you joining the conversation. So are your scenarios listed in the order you think most to least likely?

Quoting triphop
If a deal is being struck, a further devaluation would v. likely be on the cards, so a long to the previous big intervention level, 6.8 would a good call.
I wouldn't have considered to factor in a devaluation. Lots of angle to figure. Just feel in my gut this deserves a lot more attention than it's getting.

Don't love how they post these really big new articles on Friday when the masses are tuned out and focused on the weekend
It made the FF news board but not drawing any comment there either.

IMF Said to Give China Strong Signs of Reserve-Currency Nod
http://www.bloomberg.com/news/articl...rency-blessing

"Chinese officials are so confident of winning approval that they have begun preparing statements to celebrate the decision, according to two people."
"At least $1 trillion of global reserves will convert to Chinese assets if the yuan joins the IMF’s reserve basket, according to Standard Chartered Plc and AXA Investment Managers."
Yeoman the "Tough Luck" Trader =p
  • #10
  • Oct 24, 2015 9:19am Oct 24, 2015 9:19am
Quoting Tardigrade
{quote} My followup question to you guys? Should global financial meltdown ever happened, where would be the safest places(assets?) to park your $$?
U.S. pre 1934 gold and pre 1965 junk silver coins and modern silver eagles. And don't buy into any numismatic values. Just get the most ounces per dollar. Any trade-able, barter-able hard asset. Food and water. Heirloom seeds of all kinds. For cold climates lots of blankets and longjohns...woodstove and 8 to 10 cord of firewood. A really good relationship with the Creator (best cultivated before any crisis).
Yeoman the "Tough Luck" Trader =p
  • #11
  • Edited 8:27pm Oct 24, 2015 8:07pm | Edited 8:27pm
Quoting Yeoman
{quote} U.S. pre 1934 gold and pre 1965 junk silver coins and modern silver eagles. And don't buy into any numismatic values. Just get the most ounces per dollar. Any trade-able, barter-able hard asset. Food and water. Heirloom seeds of all kinds. For cold climates lots of blankets and longjohns...woodstove and 8 to 10 cord of firewood. A really good relationship with the Creator (best cultivated before any crisis).
Very thorough; I wasn't thinking we'd all go back to stone age after a hypothetical yet very probable crisis, but your answer makes sense.

Regarding the likelihood of how things would go down , my internal probability cruncher spits out the following sequence, from the highest to lowest probability:

A-55%

C-25%

B-15%

D-5%

Are you interested in this topic from a pure academic perspective, or do you think we as traders could preemptively hedge against such black swan risk, even making money from such event? If so, what instruments are you proposing?
No Highs? No Lows? Must be Bose!
  • #12
  • Oct 25, 2015 7:59am Oct 25, 2015 7:59am
they
Quoting Yeoman
{quote} I wouldn't have considered to factor in a devaluation. "
I did look up the official lines when it happened, China said it was a one-off although I take that with a pinch of salt.
This suggests ...
http://www.bloomberg.com/news/articl...oin-sdr-basket
... that they might announce inclusion in nov, but won't happen for a while. this will give them time for another devaluation before allowing it to be subject to true market forces. They've got 4 x the amount of reserves they need apparently, plenty of scope for some shenanigans

Tardigrade - interesting thoughts. I don't buy the doom and gloom on China; they've still got growth north of 7%, far outstripping everyone else. Sure it's slowing but it's still growing so I don't see any reason for big storms. yet
  • #13
  • Oct 25, 2015 10:49am Oct 25, 2015 10:49am
Quoting Tardigrade
{quote} Very thorough; I wasn't thinking we'd all go back to stone age after a hypothetical yet very probable crisis, but your answer makes sense.
Don't really want to divert off the threads topic here but....Stone age may seem a bit much.....iron age more likely. I see the next extreme financial crisis being precipitated by WWIII which is knocking at the world's door right now, and that presents it's own challenges which explains my rather extreme reply. I highly recommend the reporting and commentary at http://stormcloudsgathering.com/ regarding the impact our rather sociopathic world leaders are having on our lives.

Quoting Tardigrade
{quote} Are you interested in this topic from a pure academic perspective, or do you think we as traders could preemptively hedge against such black swan risk, even making money from such event? If so, what instruments are you proposing?
Well, I mostly by chance was on the winning side of the CHF unpegging. So I can certainly see an opportunity. Also see the vulnerability of the system and the brokers we use to trade. There's always opportunity in any big news event but if your broker gets wiped out by a massive gap on the U.S. dollar crash even if it's only temporary.....the the winners lose anyway. And this is exactly what could have happened with my account at FXCM if they could not have secured the bailout loans needed to remain solvent. How much more massive is the USD than the CHF? I don't have any proposal. Drawn down your balance till it blows over???

Quoting triphop
they{quote}Tardigrade - interesting thoughts. I don't buy the doom and gloom on China; they've still got growth north of 7%, far outstripping everyone else. Sure it's slowing but it's still growing so I don't see any reason for big storms. yet
http://gizmodo.com/welcome-to-the-wo...ina-1541512511
How much of China's growth is just fueling this massive property bubble which on its face appears to dwarf our own 08' bubble which the Fed has refused to allow to unwind as they bought billions of mortgaged backed securities over the last 7 years. Again, I don't have any real understanding of the macro impact all of this is going to have, but it can't be good. The million dollar question.....how does the individual protect and capitalize?
Yeoman the "Tough Luck" Trader =p
  • #14
  • Oct 25, 2015 8:30pm Oct 25, 2015 8:30pm
Quoting triphop
they{quote} I did look up the official lines when it happened, China said it was a one-off although I take that with a pinch of salt. This suggests ... http://www.bloomberg.com/news/articl...oin-sdr-basket ... that they might announce inclusion in nov, but won't happen for a while. this will give them time for another devaluation before allowing it to be subject to true market forces. They've got 4 x the amount of reserves they need apparently, plenty of scope for some shenanigans...
triphop-

The further devaluation you suggested already happened on Oct. 24th when PBOC announced yet another rate cut , and it was the FIFTH time, you heard that right, fifth time within one year period of 2015!!! (Desperate?)

I agree with you in terms of "there is no need to panic right now", their growth rate is still solid 7%; it is rather a question of market expectation:Western market view on China's slowing-down would have huge impact on its currency, as soon as China allowed CNY to free float (joining SDR). Should majority of western countries ever feel that China's economy were not up to the expectations, don't you think they would short the heck out of CNY, thus China's ingenious plan of WORLD DOMINATION would back fire? Just my crazy thoughts
No Highs? No Lows? Must be Bose!
  • #15
  • Oct 25, 2015 9:03pm Oct 25, 2015 9:03pm
Quoting Yeoman
{quote} Don't really want to divert off the threads topic here but....Stone age may seem a bit much.....iron age more likely. I see the next extreme financial crisis being precipitated by WWIII which is knocking at the world's door right now, and that presents it's own challenges which explains my rather extreme reply. I highly recommend the reporting and commentary at http://stormcloudsgathering.com/ regarding the impact our rather sociopathic world leaders are having on our lives. {quote} Well, I mostly by chance was on the winning...
Yeoman-

Very much so. I was thinking exactly the same thing: extreme economic disturbance forces political powers to "reshuffle the deck", so to speak.

Since the most recent financial crises, central banks around the world had been quite creative, introducing QE, negative interest rate, etc.; as evidence accumulated, those unconvental monetary policies not only didn't drive enough CPI, or job growth, but they regretably served as the primary reason of world currency war!!! the mess we are in right now.

You were on the winning side of CHF unpeg????? GeeYou must've been in some private island drinking Maitai right now?!

And yes, you are spot on about China's massive property bubble.

From a counter-party perspective, however, wouldn't you agree that multiple shots of QE had created an unprecedented equity bubble in the US as well?

Both are bubbles, both could crush global finanical system when they burst, which one will burst first?

I have been pondering on this question for quite some time.

P.S. Japan's Nikkei is another massive government-made bubble waiting to burst.
No Highs? No Lows? Must be Bose!
  • #16
  • Oct 25, 2015 9:12pm Oct 25, 2015 9:12pm
Quoting triphop
they{quote} I did look up the official lines when it happened, China said it was a one-off although I take that with a pinch of salt. This suggests ... http://www.bloomberg.com/news/articl...oin-sdr-basket ... that they might announce inclusion in nov, but won't happen for a while. this will give them time for another devaluation before allowing it to be subject to true market forces. They've got 4 x the amount of reserves they need apparently, plenty of scope for some shenanigans...

P.S. About the reserves. Are those bubbleheaded officials in china really capable of wielding their reserves as shield when the attacks come?

Further Reading

"Effective Officials in 2nd Larget Economy in the Wolrd"

http://www.bloomberg.com/news/articl...futures-market
No Highs? No Lows? Must be Bose!
  • #17
  • Oct 26, 2015 8:28am Oct 26, 2015 8:28am
Quoting Tardigrade
{quote} triphop- The further devaluation you suggested already happened on Oct. 24th when PBOC announced yet another rate cut , and it was the FIFTH time, you heard that right, fifth time within one year period of 2015!!! (Desperate?) I agree with you in terms of "there is no need to panic right now", their growth rate is still solid 7%; it is rather a question of market expectation:Western market view on China's slowing-down would have huge impact on its currency, as soon as China allowed CNY to free float (joining SDR). Should majority of western...
Nah, devaluation rather than rate cut. Basically intervening in the currency market directly like swiss franc rather than cutting the interest rate. they've been doing that loads as well prior to August, but they would have to pack that in as a condition of being part of the IMF SDR at least on paper anyway. They've announced they see no need to do it further following August (and bankers never lie of course).

China's plan of WORLD DOMINATION, I'm enjoying the caps on that... that's putting too much faith in financial institutions. If there's money to be made, it's going there full stop while growth there outstrips the west at any rate.. Their growth can't be limitless but I 'd have to see some impartial data that show that t*ts up is around the corner... interest rate cuts, dropping reserve requirements all show growth is falling, but it's still so high.
  • #18
  • Oct 26, 2015 11:45pm Oct 26, 2015 11:45pm
Quoting triphop
{quote} Nah, devaluation rather than rate cut. Basically intervening in the currency market directly like swiss franc rather than cutting the interest rate. they've been doing that loads as well prior to August, but they would have to pack that in as a condition of being part of the IMF SDR at least on paper anyway. They've announced they see no need to do it further following August (and bankers never lie of course). China's plan of WORLD DOMINATION, I'm enjoying the caps on that... that's putting too much faith in financial institutions. If there's...

triphop-
"Devaluation rather than rate cut" looks a bit confusing. What method of devaluation?

True, from a corporation or venture capitalist's standpoint China still represents one of the most lucrative opportinities, especially for retail/services industry due to its large cunsumer pool.

But let's not turn this thread into a fundamentalist's arena, shall we?

Traders trade; we are here to discuss the likely consequences of Yuan inclusion in SDR.

What's ur take on this?

back to Yeoman-

Following your original train of thought

Yuan's inclusion in SDR---Potential USD Selloff, then
If happened before Fed rate hike, and global market's still in consolidation mode, more likely to cause USD selloff, then Fed might took some pressure by hiking the rate(or they wouldn't? Strong dollar boosted demestic demand, but the flip side was that foreign operated division of US companies were wailing in the exact environment. God knows what the Fed would do?)
If happened after Fed rate hike & the market broke out DXY 100, then Yuan's SDR inclusion should had no impact whatsoever(I mean, who gives a rats ass about Yuan when the world is pushing for another dollarmania?)
If happened after Fed rate hike & yet the market broke down 92.5, then Yuan's SDR inclusion should have major impact on the market, even a long term one.


Just my pure none sense.
Check my premises to see if threre's any errors.
Would like to see the issue from a different perspective.
No Highs? No Lows? Must be Bose!
  • #19
  • Oct 27, 2015 6:01am Oct 27, 2015 6:01am
Quoting Tardigrade
{quote} triphop- "Devaluation rather than rate cut" looks a bit confusing. What method of devaluation? True, from a corporation or venture capitalist's standpoint China still represents one of the most lucrative opportinities, especially for retail/services industry due to its large cunsumer pool. But let's not turn this thread into a fundamentalist's arena, shall we?
OK I was gently nudging you to look it up. Pegs and devaluation are *not* the same as interest rate cuts. There's two main determinants of exchange rates- intervention and interest rates, both are dependent on raw fundamentals. You might want to skip past fundies, but personally I wouldn't dream of trading the world's most manipulated currency without having a firm grasp on all three. There are way easier trades out there.

My thoughts are above on UCNY in that graph. That aside, the safest, easiest trade on announcement of inclusion is long GBPUSD. Yuan will increase globally from London as a centre (this is definite), which will strengthen GBP. USD may sell off, though a lot of this is already factored in. Also short EGBP for similar reasons, flow of euros to pounds.
  • #20
  • Oct 27, 2015 8:07pm Oct 27, 2015 8:07pm
Quoting triphop
{quote} OK I was gently nudging you to look it up. Pegs and devaluation are *not* the same as interest rate cuts. There's two main determinants of exchange rates- intervention and interest rates, both are dependent on raw fundamentals. You might want to skip past fundies, but personally I wouldn't dream of trading the world's most manipulated currency without having a firm grasp on all three. There are way easier trades out there. My thoughts are above on UCNY in that graph. That aside, the safest, easiest trade on announcement of inclusion is long...
Duely noted. So devaluation is the " devaluation and revaluation are official changes in the value of a country's currency relative to other currencies, under a fixed exchange rate system", while under a float exchange rate system official announcement won't do a damn thing. Tnx for the info.

http://www.newyorkfed.org/aboutthefe...int/fed38.html

It turns out, I am on your side regarding the Long GBP trade, though my reasoning may be quite distinct from yours.

Anyway, your reactionary view on the long GBP trade is quite brilliant sir, quite brilliant.
No Highs? No Lows? Must be Bose!
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