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Rumor: China To Revalue Yuan 10% This Weekend?

Posted on: April 21, 2011

I have no way to judge that, but if it comes it is both good and bad.

The good: It’s about a third of what has to happen, and as a step function it would apply major cooling to the “Chinese miracle” inflation machine. They need to do that too, which makes the rumor plausible. Coming on a long trading weekend here (Good Friday/Passover closes us this week) and on a weekend anyway (China’s favored time to do this sort of thing) it would be appropriate both in terms of timing and event.

The bad: While there would be no direct dollar impact from this action since the Yuan is not convertible and thus not part of the $DXY index the indirect effects would be tremendously disruptive in the short term. This has a high probability of forcing corrective actions by The Fed, perhaps even before the futures market reopens Sunday night. The risk for The Fed and United States is that the dollar winds up gapping down by hundreds of pips, perhaps threatening the all-time low. Violation of the all-time low could result in massive pressing of short bets and a possible immediate fiscal crisis.

Please don’t take this article the wrong way – I strongly support a Chinese action such as this, even though it’s not enough on its own. The move in the dollar today may be related to this rumor and expectation of action over the weekend.

Beware coming into the weekend with this rumor out there; volatility is, in my opinion, radically cheap against reality and the complacency being displayed by the market is flat-out ridiculous.

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