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China's yuan currency shock hits carry-trade crowd
DateAugust 26, 2015 - 1:17PM


[Image: 1440559075277.jpg]
Buying the yuan with funds borrowed more cheaply elsewhere was one of the most reliable ways to make money earlier in the year. Photo: SeongJoon Cho

China just gave investors one more reason to shun the most popular trading strategy in the $US5.3 trillion-a-day ($7.4 trillion-a-day) currency market.
Carry trades, or borrowing one currency cheaply to invest in a higher-yielding asset elsewhere, were already suffering the biggest losses since 2008 as the rout in emerging markets sent potential purchases tumbling. By cutting interest rates two weeks after its shock devaluation, China effectively crossed the yuan off investors' shopping lists, too.
Add to this a surge in volatility - which is kryptonite for these transactions because it can wipe out the profit from the interest-rate differential - and carry traders are finding fewer and fewer ways to make money. JPMorgan Private Bank and the asset-management unit of Bank of China both say the strategy's best days are behind it.
"It's a terrible time to be long carry," said Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank of Australia. "Increased volatility - which I think we'll stay with - will continue to be terrible for carry. The period is over for carry trades."
A Deutsche Bank index tracking carry trade returns has plunged 13 per cent this year, on track for its worst annual decline since the 2008 financial crisis.
Currency volatility
The losses accelerated in the past week as bear markets in equities around the world, combined with a plunge in oil and metals prices, sent currencies from South Africa's rand to Mexico's peso tumbling to records. They're the sort of currencies investors tend to buy in carry trades because of their relatively high interest rates.
A JPMorgan Chase measure of currency volatility meanwhile approached its highest level this year, further sapping carry returns.
"Across the board, carry has been under pressure," said Kristjan Kasikov, a London-based quantitative analyst at Citigroup Inc., the world's biggest currency dealer. "Weakness in commodity prices has hit some of the high-yielding currencies quite hard."
One of the most popular carry trades in recent months was borrowing yen to buy Australian dollars, according to CBA's Capurso. Investors would pocket the difference between Japan's near-zero borrowing costs and Australia's main rate, which at the start of the year was 2.5 per cent.
The deals started to lose money, he said, as weaker growth in China and falling raw-materials prices sent the Aussie tumbling toward this week's six-year low versus the dollar. Investors in the carry trades would have lost 6 per cent in August, wiping out a 4 per cent profit in the second quarter.
Buying the yuan with funds borrowed more cheaply elsewhere was one of the most reliable ways to make money earlier in the year as China held its currency at about 6.2 to the dollar.
As recently as mid-June, BlackRock, which oversees $US4.7 trillion, was piling into the trade and predicting it would remain a good bet for the next year and a half. The deal had been popular for some time, with Deutsche Bank estimating that almost $800 billion had poured into yuan carry trades since 2010.
The transaction turned sour on August 11, when China unexpectedly devalued its currency to boost exports. Tuesday's interest-rate cut, its fifth since November, further undermined the yuan, which traded at about 6.4 per dollar Wednesday in Tokyo.
As a result, buying the yuan with borrowed euros would have lost about 7 per cent since the devaluation and 3 per cent using dollars, after gaining an average 4 percent annually over the previous four years, data compiled by Bloomberg show.
Twin policy shock
The People's Bank of China isn't the first central bank whose policy decisions upset the carry trade this year. Investors who took advantage of Switzerland's negative interest rates were left nursing losses when officials abandoned their exchange-rate cap back in January, sending the franc soaring to a record and upending deals funded in the currency.
Yet China's twin policy shocks have had the biggest impact, investors say, if only because of the sheer amount of money poured into yuan carry trades.
BOCHK Asset Management, a unit of Bank of China that overseas about $US7.7 billion, says investors in the deals will probably take profits.
The yuan was "the best carry-trade currency for years because of its low volatility," said Ben Sy, head of fixed income, currencies and commodities for Asia at JPMorgan Private Bank in Hong Kong. "Now, volatility has almost doubled. Definitely, people will unwind."
(26-08-2015, 03:16 PM)CityFarmer Wrote: [ -> ]
(26-08-2015, 12:12 PM)corydorus Wrote: [ -> ]err... US fixed the Economy. The last one is sub-prime. The Banks all get hit. AIA major holder lost control of their stake. A number of large companies bankrupt ! Insolvent small banks gone. They lowered interest rate. And they introduce QE.

What they didn't do is to support the Sub Prime Bubble. China tries to push their Bubble Index up. Make sense to you ?

Three rounds of QEs, have created not only one bubble, but many bubbles around the world. haven't they?  Big Grin

I agree. The 4.2 trillion worth of QE1+2+3 have created bubbles in (1) Gold, (2) Commodities, (3) Junk corporates, (4) Sovereign bonds, (5) real estate (Aus/London), (6) Equity markets....(there should be more)

Some have bursted (Gold, commodities), some are bursting (equity markets) and some will burst.
China central bank 'needs to do more'



[Image: dummy.gif]     A commercial shopping district in Beijing, China.PHOTOS: EUROPEAN PRESSPHOTO AGENCY, BLOOMBERG


Experts predict further easing of interest rates, bank reserve ratio
BEIJING • Central bank governor Zhou Xiaochuan is probably not finished yet.
Even after cutting interest rates for the fifth time since last November and telling banks they can hoard less cash, the People's Bank of China (PBOC) governor remains under pressure to do more to support the world's No. 2 economy amid the biggest slide in stocks since 1996.
"A circuit breaker is needed to dispel excessive pessimism and restore confidence," said Mr Frederic Neumann, co-head of Asian economics research at HSBC Holdings in Hong Kong. "Further support measures in the coming weeks and months will be needed."


Equities around the world initially rallied on Tuesday after the PBOC said it will cut the one-year lending rate by 25 basis points to 4.6 per cent and lowered the required reserve ratio by 50 basis points for all banks. In the United States, a gain of as much as 2.9 per cent in the Standard & Poor's 500 Index was erased in late trading.
Quote:MORE SUPPORT NEEDED
A circuit breaker is needed to dispel excessive pessimism and restore confidence. Further support measures in the coming weeks and months will be needed.
MR FREDERIC NEUMANN, co-head of Asian economics research at HSBC Holdings in Hong Kong, on the Chinese economy
Mr Zhou swung into action two weeks since a devaluation of the yuan and a deceleration in China's economy ignited fears about the outlook for global growth.
The Shanghai Composite Index fell 1.3 per cent, closing at 2,927.29 yesterday. The yuan declined and interest-rate swaps fell the most since June.
"This is a positive development that will help curb investor anxiety about a pronounced slowdown in China's growth," said Mr Tim Condon, head of Asian research at ING Groep NV in Singapore. "It should curb contagion to global markets."
Mr Shane Oliver, head of investment strategy at fund manager AMP Capital Investors in Sydney, is among those predicting further reductions in rates and the reserve ratio. He anticipates China will cut its benchmark lending rate to 4 per cent by the year end, using an arsenal unavailable to counterparts such as the Federal Reserve which already run key rates near zero.
"China's monetary policy is way too tight," Mr Oliver said. "Further easing in both interest rates and the reserve ratio will be needed."
The fresh easing reinforces efforts by policymakers to deliver on Premier Li Keqiang's growth goal of about 7 per cent for this year. The goal is being jeopardised by deflation risks, overcapacity and a debt overhang, which leave the economy poised for its slowest expansion since 1990.
Industrial production, investment and retail data all trailed analysts' estimates last month.
The easier conditions for banks may have been necessitated by a need to offset a drying-up of liquidity in markets, following the surprise decision on Aug 11 to devalue the yuan.
The PBOC subsequently bought its currency to stabilise the exchange rate and curb capital outflows. China Merchants Securities estimated that the policy action is the equivalent of releasing 700 billion yuan (S$153 billion) into the financial system.
The economy still faces downward pressure, and the task of stabilising growth, adjusting its structure, pushing reforms and improving living standards is very challenging, the PBOC said in a statement released after the move. Given the volatility in global financial markets, it needs to "use monetary policy tools more flexibly", it said.
China has halted intervention in the stock market so far this week as policymakers debate the merits of an unprecedented government campaign to support share prices, according to people familiar with the situation.
BLOOMBERG
A "pro-China" report from a prominent western media, the Bloomberg?  Big Grin

China doesn't look that bad compared to other market meltdowns
By Bloomberg 

NEW YORK (Aug 27): Losing US$5 trillion ($7 trillion) in China’s equity-market rout in just two months is bad. But measured by the intensity of the price swings, the selloff still fails to stand out among past market meltdowns.

China has the world’s most volatile stocks right now after Greece, yet the fluctuations are 30% lower than the average of six financial market crashes, including the ones in 1929 in the US, Japan in the early 1990s and Thailand in 1997. The 43% decline so far in the Shanghai Composite Index looks modest when compared with a 78% peak-to-bottom retreat during the bursting of the dot-com bubble in 2000 and an 84% slump in the Russian market following the 1998 default.

While the declines have destroyed wealth equivalent to the combined economic output of Germany and Italy and forced unprecedented government intervention, the fallout is unlikely to be as severe as other global economic debacles. Most of the previous stock frenzies were caused by banking crises and debt defaults, China’s stock slump is largely a price adjustment to a frothy valuation following a more than 150 percent surge.

“The big distinction is that there’s a market correction in China, but there’s no financial crisis,” said David Loevinger, a former China specialist at the US Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles.
...
http://www.theedgemarkets.com/sg/article...-meltdowns
'I've lost £40,000 on the Chinese stock market'
http://www.bbc.com/news/world-asia-china-34070031
(27-08-2015, 09:47 AM)Behappyalways Wrote: [ -> ]'I've lost £40,000 on the Chinese stock market'
http://www.bbc.com/news/world-asia-china-34070031
At least he didnt do margin trading. Plenty of cheap and empty apartment for him to rent anyway..

sent from my Galaxy Tab S
(27-08-2015, 09:41 AM)CityFarmer Wrote: [ -> ]A "pro-China" report from a prominent western media, the Bloomberg?  Big Grin

China doesn't look that bad compared to other market meltdowns
By Bloomberg 

NEW YORK (Aug 27): Losing US$5 trillion ($7 trillion) in China’s equity-market rout in just two months is bad. But measured by the intensity of the price swings, the selloff still fails to stand out among past market meltdowns.

China has the world’s most volatile stocks right now after Greece, yet the fluctuations are 30% lower than the average of six financial market crashes, including the ones in 1929 in the US, Japan in the early 1990s and Thailand in 1997. The 43% decline so far in the Shanghai Composite Index looks modest when compared with a 78% peak-to-bottom retreat during the bursting of the dot-com bubble in 2000 and an 84% slump in the Russian market following the 1998 default.

article may be written a little prematurely, the crash may not be over yet. There has also been unprecedented gov intervention this time round. We'll see..

sent from my Galaxy Tab S
This is probably the highest risk, rather than the stock market, IMO...

China’s market turmoil raises questions over Premier’s future

BEIJING — The China-led turmoil that has rocked global markets in the past two weeks has also shaken the ruling Communist Party and left Prime Minister Li Keqiang fighting for his political future, said analysts and people familiar with the internal workings of the party.

Among party officials and politically connected people in Beijing, the hottest topic of conversation is whether Mr Li will take the fall for Beijing’s perceived mismanagement of the stock market crash and the country’s broader economic slowdown.
...
http://www.todayonline.com/world/chinas-...ers-future
(27-08-2015, 09:53 AM)BlueKelah Wrote: [ -> ]
(27-08-2015, 09:41 AM)CityFarmer Wrote: [ -> ]A "pro-China" report from a prominent western media, the Bloomberg?  Big Grin

China doesn't look that bad compared to other market meltdowns
By Bloomberg 

NEW YORK (Aug 27): Losing US$5 trillion ($7 trillion) in China’s equity-market rout in just two months is bad. But measured by the intensity of the price swings, the selloff still fails to stand out among past market meltdowns.

China has the world’s most volatile stocks right now after Greece, yet the fluctuations are 30% lower than the average of six financial market crashes, including the ones in 1929 in the US, Japan in the early 1990s and Thailand in 1997. The 43% decline so far in the Shanghai Composite Index looks modest when compared with a 78% peak-to-bottom retreat during the bursting of the dot-com bubble in 2000 and an 84% slump in the Russian market following the 1998 default.

article may be written a little prematurely, the crash may not be over yet. There has also been unprecedented gov intervention this time round. We'll see..

sent from my Galaxy Tab S

I agree, it is premature to conclude, either "doesn't look that bad" or "is really bad" now... Tongue
Sharing an article from Reuters. China's Zhou Xiao-Chuan is facing a very important, yet very difficult task...

Impossible trinity gives China a difficult choice
By Reuters / Reuters   | August 27, 2015 : 12:17 PM MYT  

SINGAPORE (Aug 27): Beijing can bend the laws of economics, but it can’t break them. The central bank’s impressive foreign currency war chest gives China the room to muddle through between three objectives: lower interest rates, a stable yuan, and a reasonably open capital account. But reconciling what economists have dubbed the “impossible trinity” is beyond the grasp of even the People’s Republic.

On Aug. 26, Chinese stock market investors seemed incapable of deciding whether the People’s Bank of China’s rate cut the previous evening was a pill or poison. The anxiety shows the tough road ahead. If investors conclude that lower mainland interest rates and more relaxed lending norms signal an increase in the money supply, they might take more capital out of China.

The “impossible trinity” theorises that countries cannot simultaneously control monetary policy and the exchange rate while letting capital flow freely. In practice, this gives China’s authorities very little choice. If they want to set interest rates lower and yet keep Premier Li Keqiang’s promise to keep the currency stable they will have to consider locking up capital. Macau police raids to prevent illegal cash leaks from the mainland suggest a renewed determination to restrict unauthorised cross-border flows. But any reversal of China’s gradual loosening of its capital account would undermine the country’s bid to add the yuan to the International Monetary Fund’s elite quasi-currency club this November.

A revival in economic growth might reverse the outflows. But the lackluster global economy, and the mainland’s twin problems of excess capacity and excessive debt, makes that hard to achieve. In the short term, China’s best hope may be that its economic woes continue to reverberate through world markets so that the Federal Reserve refrains from raising U.S. interest rates.

In the meantime, the only way Beijing can maintain the semblance of a stable currency against a resurgent U.S. dollar is to defend the yuan by selling down its reserves. That won’t help confidence either. At US$3.65 trillion ($5.1 trillion) at the end of June, the kitty is sufficiently large to help China muddle through the impossible trinity for a while, but not large enough to reverse capital outflows if they become self-fulfilling.
http://www.theedgemarkets.com/sg/article...ult-choice