August 11th - RMB vs US Dollar, UST Sales & Eurodollars
August 11th, 2015: "Why is the US Dollar down so hard today, after a second devaluation of the Yuan by Chinese officials overnight?"
UST sales (China, Japan defending their currencies and Treasury auctions). Don't worry this is a healthy and needed pullback. The stronger and longer the pullback, the better. The counterweight of the Eurodollar market should swing it back the other way. The upward trend should resume with the dollar running through commodities like a raped ape by Dec. causing a flash crash. Then some unwinding, further slowdown, scope and scale, TBD.
If the upward trend went unbroken,the unwind from the implosion would be most unkind. A global flight from the dollar would result in global economic chaos and catastrophe of biblical epic proportion, so there shall not be one.
When the PBOC sells UST's, they get paid in dollars. RMB was issued by the PBOC to buy the dollar debt, expansionary for them. As for the dollars upon sale or redemption. If they repatriate those dollars they must exchange them for RMB, reducing the domestic RMB float and even more so with a devalued RMB, driving up the value of the RMB and making it contractionary for their economy.
What happened early to mid last week August 11, 2015, while the depreciation of RMB was going on? UST sales, more eurodollars, eurodollar futures declined, Libor increased, dollar declined, oil bounced a little. When the bond sales stopped on THU, FRI, everything reversed and oil went back down while the dollar rebounded.
"I will do better to continue to borrow at short term rates, rather than long, on my home, and to not worry too much about the fed raising rates."
The flattening we have seen might continue. HYPOTHETICAL: short term rates rise (even if the Fed does not raise, due to defaults, a "lack" of short term HQLA, a continuing ED market squeeze on the dollar short). Meanwhile the long end on UST's gets squeezed in a flight to safety. This is concomitant with the possibility of both the PBOC and the Fed reducing their balance sheets by selling long term UST's which they hold. The long term bond selling might counteract the aforementioned dollar squeeze, and any rate decrease from flight to quality in longer duration UST's, but not the short term rate rise. TBD and it depends on the old men down the road.
The market elephants are clearly betting (eurodollar futures net short, long term bond net long) on any or all of the following: continued economic contraction or malaise ; a flight to safety; Fed raises. In all cases, long term rates decline, short term rates rise and the dollar either stays relatively strong or raises the roof and shoots the moon.
UST sales (China, Japan defending their currencies and Treasury auctions). Don't worry this is a healthy and needed pullback. The stronger and longer the pullback, the better. The counterweight of the Eurodollar market should swing it back the other way. The upward trend should resume with the dollar running through commodities like a raped ape by Dec. causing a flash crash. Then some unwinding, further slowdown, scope and scale, TBD.
If the upward trend went unbroken,the unwind from the implosion would be most unkind. A global flight from the dollar would result in global economic chaos and catastrophe of biblical epic proportion, so there shall not be one.
When the PBOC sells UST's, they get paid in dollars. RMB was issued by the PBOC to buy the dollar debt, expansionary for them. As for the dollars upon sale or redemption. If they repatriate those dollars they must exchange them for RMB, reducing the domestic RMB float and even more so with a devalued RMB, driving up the value of the RMB and making it contractionary for their economy.
What happened early to mid last week August 11, 2015, while the depreciation of RMB was going on? UST sales, more eurodollars, eurodollar futures declined, Libor increased, dollar declined, oil bounced a little. When the bond sales stopped on THU, FRI, everything reversed and oil went back down while the dollar rebounded.
"I will do better to continue to borrow at short term rates, rather than long, on my home, and to not worry too much about the fed raising rates."
The flattening we have seen might continue. HYPOTHETICAL: short term rates rise (even if the Fed does not raise, due to defaults, a "lack" of short term HQLA, a continuing ED market squeeze on the dollar short). Meanwhile the long end on UST's gets squeezed in a flight to safety. This is concomitant with the possibility of both the PBOC and the Fed reducing their balance sheets by selling long term UST's which they hold. The long term bond selling might counteract the aforementioned dollar squeeze, and any rate decrease from flight to quality in longer duration UST's, but not the short term rate rise. TBD and it depends on the old men down the road.
The market elephants are clearly betting (eurodollar futures net short, long term bond net long) on any or all of the following: continued economic contraction or malaise ; a flight to safety; Fed raises. In all cases, long term rates decline, short term rates rise and the dollar either stays relatively strong or raises the roof and shoots the moon.
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