Are Investors Missing the Chinese Currency Devaluation?

Are Investors Missing the Chinese Currency Devaluation?
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It's hunting season on Wall Street and the target is the elusive Black Swan. The thing about Black Swans is that we all think we can see them, but the belief that one can see a Black Swan - by definition - makes the aforementioned swan no longer black. Said another way, you never get hit by the bus you can see. So why is BK suggesting that he has the super-power needed to spot water-fowl of various colors? He is not, BUT BK's job as a money manager is to look out for risks that the markets may not be fully appreciating. To that end, BK submits that the financial markets may be so focused on the US elections that they are missing a very obvious threat. A Chinese currency devaluation.

Since the beginning of August 2016 the Yuan has weakened vs the dollar by 2%. While this may seem like a small amount, recall that in August 2015 a 3% devaluation sent the markets reeling. To be fair, the 3% devaluation occurred at one time and was a complete surprise. This time, the devaluation has been gradual and in fact BK has argued that from the Chinese perspective there has been no devaluation at all - the weakening vs the dollar was simple to keep the Yuan stable vs a basket of currencies.

But something is happening in the Bitcoin market that implies the Yuan may be ready for further devaluation. Since the August 2015 Yuan devaluation, Bitcoin (traded in China) has served as good proxy for both Chinese capital flight and currency weakness vs. the dollar.

It's not a perfect match but it's close enough for those of us trying to spot Black Swans. What's even more interesting is the surge in trading volume on the Chinese bitcoin market. In the last month, the volume for bitcoin traded in China has surged 10 fold!

Historically a surge in bitcoin volume has corresponded with Chinese capital flight and devaluation.

So what is the Bitcoin/Yuan market telling us now? A: The Yuan is poised for a 2% devaluation.

BK arrives at this calculation by teasing out the implied USDCNY spot rate based on the actual Bitcoin/Yuan rate. Using this method "we" find that the implied value for the USDCNY is 6.90 or 2% lower from current prices. Form BK's perch the pressure is mounting for a further devaluation in the Chinese currency. Perhaps, it occurs (like in August 2015) right before the FOMC meeting as a warning not to raise rates?


Brian Kelly, founder and CEO of BKCM LLC, is an expert in global financial markets, macroeconomics, digital currencies, and blockchain technology.  He's the author of The Bitcoin Big Bang: How Alternative Currencies Are About to Change the World.  

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