The vital G20 Currency Accord that stabilised world markets back in February as they became increasingly panicky has, very quietly, come completely undone without anyone apparently noticing; perhaps in large part because few were aware that it even existed. As a result financial markets haven’t yet reacted, helped no doubt by ever more gushing monetary incontinence by Central Bankers but also, to be fair, because there are some pretty colourful events to keep everyone occupied front and centre.
After all with the omnipresent BREXIT spectacle of UK and EU politicos aiming to out-do each other in Europe’s latest unpleasant imbecility contest and the US apparently aiming to socially implode with a choice of electing either a dreadful deluded narcissist or a dreadful corrupt sociopath to President then the fate an accord that was never officially announced can easily slip by unnoticed.
However to investors, savers, anyone with a job, a business, a pension…well basically anyone of mature age and in charge of their faculties…..this is a pretty worrying event. However before we provide an introductory overview (delving deeper into the details in some following posts…with lots of charts!) it is worth diverting to a wonderful revelation brought forth on CNBC which perhaps explains why the obvious is often missed by the City and Wall Street. Right up until it knocks them sideways.
What we had the other week on CNBC’s UK morning Squawk Box show was a clearly well-educated and professional part of Citi’s macro strategy team who was discussing key issues and covered how that China had stealthily devalued by around 6% (at the time) this year and no-one had panicked, unlike August last year when the market fell out of bed in reaction to a sudden smaller devaluation.
When asked why this had received so little market attention the Citi strategist explained how those working in his universe could become so focused on single events (BREXIT early in the summer, the prognostications of the US Fed now, the US elections shortly) that the entire City/Wall Street community had a tendency to become, monomaniacal, or in other words, obsessively focused on a single subject.
Suddenly the scales were lifted from my eyes as it became clear why the blithering dolts get sooooo many things wrong……even though they are all well-educated and on 6/7 figure incomes and have proved themselves in the shark tanks of the big banks (so are very good at kissing *** and sounding smarter than they are ). Literally his narrative was very clear; all of the teams from all the banks are all focusing on the same thing at the same time, which pretty much explains the epic group-think.
More importantly it explains how certain markets can become so irrational for so long as everyone with big pockets is playing in the same pond, making waves and feeling clever, often totally oblivious if there is a tsunami rushing in from the coast.
Anyway back to the G20 Currency Accord, which was focused on two key players in the world economy (US and China) and their currencies because as the Yuan falls and the Dollar rises asset markets have suddenly became very unhappy (more detail on why in further posts). Hence we had the sharp falls in late summer 2015 and the opening weeks of 2016.
In very, very basic terms the G20 Currency Accord in February was an agreement that China would hold its currency steady, or strengthen it, and focus on stimulating its economy (which it has done massively, with largely bad results), while the US would stop talking up interest rates and hence the dollar, taking pressure off asset markets. Effectively this agreement, although unpublished, is seen by those who know as behind the subsequent stabilisation of risk assets globally, yet there is only the merest vague hint at it in the official G20 communique: “We are taking actions to foster confidence and preserve and strengthen the recovery. We will use all policy tools – monetary, fiscal and structural – individually and collectively to achieve these goals.”
Frankly that can, and normally would (it is a small bit of the rambling second part of the official communique), mean less than nothing, however here it appeared to have substance.
Now we will look into the logic behind these events as well as the detail in coming posts, however for the moment let’s look at how the Yuan has behaved in simple graphical terms, beginning with an eight year chart tracking the Dollar/Yuan rate from the days of the GFC in 2008 until 10th October 2016, when this post first came to mind (after the aforementioned Citi strategists performance):
Source: TradingEconomics.com Click/Tap to Enlarge
You can see on the far right the dollar is moving strongly against the Yuan, however look below at the same chart dated on the 25th October, showing increasing momentum:
Source: TradingEconomics.com Click/Tap to Enlarge
Beyond the steepness of the short term trend however is that it’s very clear here how after being pegged in the early years post GFC the Yuan was slowly allowed to appreciate against the dollar (hence the descending chart as the dollar falls relatively) moving in a steady fashion until after a brief flurry of volatility it settles back at around 6.2 until August 2015, when that sharp spike occurs as the overnight devaluation upset markets.
Let’s zero in a bit to the last eighteen months:
Source: TradingEconomics.com Click/Tap to Enlarge
You can then see the currency regain a little ground before falling through to the year end, which again sparked the falls in the early weeks of 2015. Then the trend reverses, stabilises for a while before the steady march begins quietly again as the summer roles onwards and accelerates into the autumn.
So far not a dicky bird from markets (although a sudden significant reversal of flows into Emerging Markets in the last couple of weeks could herald something), however in the next post we will look into the issue in more details with a number of charts that should pose some serious questions for all investors. In the meantime to whet your appetite below is a chart from the uber Bears at ZeroHedge pointing out how the relationship between the S&P and the Dollar/Yuan rate (in this case inverted from the chart above) that had been close for a while and retained a significant correlation through the growing volatility has in recent months come apart.
Source: ZeroHedge Click/Tap to Enlarge
Significantly for the correlation to get back on track either the Yuan needs to rapidly rise (very unlikely to happen on fundamentals) or the S&P needs to fall sharply (very rational on fundamentals), and, as we will show very shortly this is not a one-off correlation but part of a much larger set of market patterns.