Ever since the beginning of this month, the Chinese Yuan has been gradually weakening. In fact, it traded at a six-year low this week and the offshore Yuan hit an all-time low since its inception in 2010.
The reason this is happening, on the surface, is because of the recent strength of the U.S. dollar as the market continues to discount a higher probability of both a December rate hike from the U.S. Federal Reserve, and a Hillary Clinton victory in the election now less than two weeks away.
As it has in the past, China has once again quietly weakened its currency while the world is distracted with major events.
That being said, however, the market has not treated this as a temporary move. It seems to believe that the Yuan will continue to gradually weaken until the end of next year. This is a trend that has been ongoing from the beginning of this year and as a result the Yuan has been the biggest loser of all the Asian currencies.
There continues to be a strong capital outflow from China that is due to its highly indebted economy with inflated property markets still heavily funded by government-financed institutions. While this chokes their economic growth, market reaction has been surprisingly relaxed – perhaps because it knows the Chinese government will ultimately take care of its debt.
As long as the market seems orderly, most believe that the People’s Bank of China will let the Yuan gradually weaken to encourage exporting from its ailing economy.
Given this market consensus for a weaker Yuan, combined with tighter capital controls that make it more difficult for Chinese investors to buy foreign currencies, we have been seeing an interesting phenomenon. Investors are diversifying their Yuan assets into gold and even into cryptocurrencies, such as Bitcoin. Typically, the stronger U.S. dollar would result in lower commodity prices, but the fact that precious metal prices such as gold and silver are now inching higher is due to this influx of Chinese money.
Bitcoin has also crept up to highs it hasn’t seen since August and 90 percent of the trading in this cryptocurrency currently is said to be from the Chinese community.
My View: We are not suggesting buying commodities or Bitcoin based on this information – especially since cryptocurrencies are still in an infant stage of development. The amount of money going into assets other than currencies is still dwarfed by the $5 trillion daily foreign exchange market and a smaller volume market always brings higher volatility. However, should the commodities and cryptocurrency markets become significantly bigger, it is probably worth thinking about whether there will be any unintended consequences of this phenomenon upon the global economy.
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