Napier Gets It: China Must Sell Treasuries, U.S. Rates Up, U.S. Dollar Up, Yuan Tumbles

The ultimate ironic denouement for the dollar bears: China dumps treasuries and USD soars.

ZH: Russell Napier: What Happens When Markets Realize China Is A Forced Seller Of Treasuries

So could the liquidation of US Treasuries by EMs, in an effort to defend their exchange rates, also push up Treasury yields? This was the forecast in the May 2011 paper and it was very wrong. It was wrong because the Fed was an aggressive buyer of Treasuries, but the Fed is not currently in the marketplace.

Today the yield on Treasuries is set by the actions of foreign central bank activity and the global private sector. The Solid Ground has long wondered how US Treasury bulls in the private sector would react if they knew in advance that the second largest owner of Treasuries, the PBOC, was a forced seller of Treasuries. Such compelled selling would be obvious before US markets opened each morning as downward pressure on the RMB exchange rate in Asia forced the PBOC to liquidate foreign currency assets to defend the fixed exchange rate. Would even Treasury bulls stand in the way of such a large and predictable liquidation? If they didn’t then the second phase of The Great Reset would come to pass and the decline of EM external deficits would force tighter monetary policy in both EM and DM.

PBOC liquidation of Treasuries to support the RMB exchange rate would not be prolonged. Both the US and China would recognize the dreadful dynamics inherent in such a policy if it did indeed push Treasury yields higher. Very soon China would be given the permission to devalue its exchange rate and the nature of the pain to be endured by the global system would be of a somewhat lesser and somewhat different nature. It would, however, still be a deflationary adjustment.

The depreciation is coming. The poetic Austrian justice target is 8.28 yuan to $1. A 10% depreciation isn't huge and that only takes the yuan to about 6.8 from current levels. Something north of 7 is the minimum.