ZH: The Fatal Fallacy Of Faith In The Fed's Assumed Powers
In the parlance of what I have used to describe for Brazil, the PBOC like Banco do Brasil enticed Chinese banks already short (synthetically) the “dollar” to become more so – all because they are coaxed into believing, as Yellen, that the central bank will have it covered on the other end. The PBOC’s motivation is only immediate, just hoping that the unwind into the future can be more manageable. What Brazilian banks found was quite the opposite, and Brazil is now suffering greatly for it.China is growing the bearish bets against the yuan by providing liquidity to the derivatives market. Instead of stabilizing the yuan, the PBoC has destabilized it by weakening the position of the PBoC and Chinese banks. The Chinese central bank has gone all in. If there's no bullish turn, no positive outcome for the yuan, the decline is going to be all the larger and disorderly due to central bank policy.
Trouble will resume as soon as the U.S. dollar breaks out to a new high. Here's the Bloomberg USD Index, which has about 31% in the euro and 19% in the yen, which is much less, and much more, respectively, than DXY. This index also has some exposure to Chinese, Mexican, Korean and Brazilian currencies.
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