by Nico Isaac
Updated: April 05, 2017
It’s begun! One of the most controversial countdowns of 2017. On Thursday, April 6 U.S. President Donald Trump will meet with his Chinese counterpart Xi Jinping. It's no secret the two men aren't on the best terms, especially after Trump called Jinping and the People's Bank of China "the grand champion of currency manipulation.”
Not surprisingly, the outcome of the meeting has investors across the globe on pins and needles, waiting to see how or if Xi responds to Trump's accusations; will he order the People's Bank to reverse its policies of yuan depreciation or will he rebel and allow the Bank's value-decreasing measures to continue -- reputation be damned.
We can't say what will happen. It's an important political milestone, without a doubt.
But in our opinion, it's not a financial one. In other words, we believe the actions of the People's Bank of China do not control the yuan's long-term value. In other, other words: It’s not the PBOC who’s the “grand champion of currency manipulation”—the market is.
Let’s do a little fact-checking: Over the last two years, the yuan has endured a gut-wrenching bear market, collapsing to its weakest level against the U.S. dollar since the “dark ages” of December 2008.
Per the mainstream consensus, the main cause of the yuan’s crash was the People’s Bank’s surprise devaluation in August 2015. But we see a major problem with that timeline; namely, the PBOC did “shock the yuan” on August 11, 2015 -- but the currency's downtrend kicked off long before that.
To be clear: the yuan started falling nearly two years earlier, amidst one of the most liberal, hands-off reins in the People's Bank's history.
Here, we configure a more realistic timeline:
China's yuan wraps up its eighth consecutive annual gain, soaring 35% against the U.S. dollar since 2005 -- when the People's Bank of China removed the currency's peg to the greenback and instated a "managed float" based on a basket of currencies.
The People's Bank is also four years into opening of an offshore yuan market in Hong Kong, further loosening its grip on the currency.
And, the bank just increased its foreign exchange reserves to an all-time record high of $3.8 trillion.
By many measures, this was a historically accommodating time for the yuan. The People's Bank had the currency on a very long leash. And, according to the mainstream experts, it was just the freedom it needed to keep the wind at its back and the bullish trend firmly intact.
Here, this January 15, 2014 Wall Street Journal resets the scene:
"Yuan can Become Dominant World Currency...
"We expect the yuan to pass the number 6 [on the downside] against the dollar, marking a new era for the currency, coinciding with further renminbi liberalization."
It made perfect sense -- from a fundamental perspective. But from an Elliott wave perspective, the bullish era for the yuan was coming to an abrupt end.
Starting in early 2014, our analysts were all-hands-on-deck in charting a dramatic trend change for the yuan -- in spite of the accommodating policies of the People's Bank.
Our March 18, 2014 Asian-Pacific Short Term Update said:
"In the past few weeks, the yuan market has shown a dramatic change. The dollar is rallying and the yuan falling as wave 5 appears complete. With prices breaking out now above the upper weekly Keltner channel for the dollar versus the yuan, we can state that a very large dollar rally is in its early stages."
Next, our December 15, 2015 Asian-Pacific Short Term Update identified a specific target for the renewed uptrend:
"We're seeing the Chinese yuan's steady devaluation as the fixed onshore exchange rate continues to follow the offshore rate, where the dollar is moving higher. The 6.80 level of Minor wave 4's trading range as shown on the monthly chart is our minimum target for this move."
Now, flash ahead to today. The chart bellows shows the yuan's reversal (inverted) against the U.S. dollar, meeting our long-standing 6.8 target.
While all eyes are on the Trump-Xi Summit on April 6 to gauge the yuan’s long-term future -- our monthly April 2017 Asian-Pacific Financial Forecast presents several key pieces of evidence in support of one overarching move:
“Bloomberg reported on February 13 that the offshore futures market erased its premium over the onshore exchange rate amid speculation that investors are returning to bearish positions.”
How these “bearish positions” fit into our outlook might surprise you.