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Chinese Yuan: When Fundamentals Don't Matter

The responsibility for the yuan's crash lies not in Trump or People's Bank of China; it's in investor psychology.

by Nico Isaac
Updated: November 18, 2016

Talk about putting the wan back in the yuan. On November 15, China's currency plunged to its lowest level against the U.S. dollar since December 2008, also known as the most recent financial "Dark Ages."

Why is the renminbi crashing?

Well, some experts have tossed two "wet noodles" onto the wall of "market fundamentals" to see which sticks. First, the yuan is falling on fears of an unpredictable actions of People's Bank of China, the uncertainty of which is "reviving memories of China's surprise devaluation last August and another rapid depreciation early this year." (Fortune)

And second, the yuan is falling on the surprise victory of the next U.S. president:

"Donald Trump's win in U.S. presidential election sends China yuan plunging... We believe the outcome of a Republican clean sweep means fiscal loosening is now a foregone conclusion. We believe this will lead to a... higher dollar." (CNBC)

But we see a major problem with that timeline; namely, the currency's downtrend kicked off long before both the PBC "shocked the yuan" on August 11, 2015 -- as well as before the "shock" U.S. presidential win of November 9, 2016.

It started nearly two years earlier. Amidst one of the most liberal, hands-off reins in the People's Bank's history -- AND, when Donald Trump was merely a billionaire real estate tycoon turned reality TV star.

Here, we configure a more realistic timeline:

January 2014:

  • 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 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.

March 18, 2014 Asian-Pacific Short Term Update:

"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."

April 27, 2014 Asian-Pacific Short Term Update:

"Trends that last such a long time see many participants get on board. Dollar weakness against the yuan has been a "sure thing" in recent years.

"Further acceleration of this dollar rally and yuan decline appears likely, with this instability sowing the seeds for large global financial losses, as so many market participants have comfortably held yuan longs with seemingly little risk."

May 2014 Elliott Wave Financial Forecast:

"The chart of the Chinese yuan per U.S. dollar shows a completed five-wave decline from 1994. It means that a major dollar rally relative to the yuan is now starting. It should be the biggest in 20 years."

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 mid-November of this year. The chart bellows shows the yuan's reversal (inverted) against the U.S. dollar, meeting our long-standing 6.8 target.

Now, the November 8 Asian-Pacific Short Term Update's special video analysis of the yuan market turns your attention to these illuminating finds:

  • The relationship between the "offshore" and "onshore" yuan, combined with clearly defined momentum indicators, strongly suggests the dollar's trend is headed one way.
  • A "fascinating" chart of yuan vs. Bitcoin shows that the virtual currency is almost like a "doorway that allows some Chinese to exit yuan." But participating in the proxy holds risks. We explain what those are.

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