Yuan Direction

Donald L. Luskin
Tuesday, February 16, 2016
An end to RMB instability and a stealth rally in commodities should relieve the air of panic.
Strategic view: 

China’s one-day revaluation, and Zhou’s statements indicating that RMB needn’t weaken further, should help dispel the atmosphere of panic in markets, likely establishing last week’s double-test of the August 2014 lows by US stocks as a bottom. The twin causes of the unwelcome appreciation of RMB – triggering six months of destabilizing devaluation – have dissipated. The Fed has been knocked off its rate-hiking course, whether or not it truly understands its “liftoff” error. And oil probably double-bottomed last week, while most other commodities have been quietly rallying throughout the New Year even as panic has taken hold. Much longer-term, we think that China will want to divest is vast USD holdings, which would have the paradoxical effect of weakening both RMB and USD – and triggering an inflationary boom.