Rickards Warns "Prepare For A Chinese Maxi-Devaluation"

Authored by James Rickards via The Daily Reckoning,

China is a relatively open economy; therefore it is subject to the impossible trinity.

China has also been attempting to do the impossible in recent years with predictable results.

Beginning in 2008 China pegged its exchange rate to the U.S. dollar. China also had an open capital account to allow the free exchange of yuan for dollars, and China preferred an independent monetary policy.

The problem is that the Impossible Trinity says you can’t have all three. This model has been validated several times since 2008 as China has stumbled through a series of currency and monetary reversals.

For example, China’s attempted the impossible beginning in 2008 with a peg to the dollar around 6.80. This ended abruptly in June 2010 when China broke the currency peg and allowed it to rise from 6.82 to 6.05 by January 2014 — a 10% appreciation.

This exchange rate revaluation was partly in response to bitter complaints by U.S. Treasury Secretary Geithner about China’s “currency manipulation” through an artificially low peg to the dollar in the 2008 – 2010 period.

After 2013, China reversed course and pursued a steady devaluation of the yuan from 6.05 in January 2014 to 6.95 by December 2016. At the end of 2016, the Chinese yuan was back where it was when the U.S. was screaming “currency manipulation.”

Only now there was a new figure to point the finger at China. The new American critic was no longer the quiet Tim Geithner, but the bombastic Donald Trump.

Trump had threatened to label China a currency manipulator throughout his campaign from June 2015 to Election Day on November 8, 2016. Once Trump was elected, China engaged in a policy of currency war appeasement.

China actually propped up its currency with a soft peg. The trading range was especially tight in the first half of 2017, right around 6.85.

In contrast to the 2008 – 2010 peg, China avoided the impossible trinity this time by partially closing the capital account and by raising rates alongside the Fed, thereby abandoning its independent monetary policy.

This was also in contrast to China’s behavior when it first faced the failure of its efforts to beat impossible trinity. In 2015, China dodged the impossible trinity not by closing the capital account, but by breaking the currency peg.

In August 2015, China engineered a sudden shock devaluation of the yuan. The dollar gained 3% against the yuan in two days as China devalued.

The results were disastrous.

U.S. stocks fell 11% in a few weeks. There was a real threat of global financial contagion and a full-blown liquidity crisis. A crisis was averted by Fed jawboning, and a decision to put off the “liftoff” in U.S. interest rates from September 2015 to the following December.

China conducted another devaluation from November to December 2015. This time China did not execute a sneak attack, but did the devaluation in baby steps. This was stealth devaluation.

The results were just as disastrous as the prior August. U.S. stocks fell 11% from January 1, 2016 to February 10. 2016. Again, a greater crisis was averted only by a Fed decision to delay planned U.S. interest rate hikes in March and June 2016.

The impact these two prior devaluations had on the exchange rate is shown in the chart below.

Major moves in the dollar/yuan cross exchange rate (USD/CNY) have had powerful impacts on global markets. The August 2015 surprise yuan devaluation sent U.S. stocks reeling. Another slower devaluation did the same in early 2016. A stronger yuan in 2017 coincided with the Trump stock rally. A new devaluation is now underway and U.S. stocks may suffer again.

By mid-2017, the Trump administration was once again complaining about Chinese currency manipulation.

This was partly in response to China’s failure to assist the United States in dealing with North Korea’s nuclear weapons development and missile testing programs.

For its part, China did not want a trade or currency war with the U.S. in advance of the National Congress of the Communist Party of China, which begins on October 18.

President Xi Jinping was playing a delicate internal political game and did not want to rock the boat in international relations. China appeased the U.S. again by allowing the exchange rate to climb from 6.90 to 6.45 in the summer of 2017.

China escaped the impossible trinity in 2015 by devaluing their currency.

China escaped the impossible trinity again in 2017 using a hat trick of partially closing the capital account, raising interest rates, and allowing the yuan to appreciate against the dollar thereby breaking the exchange rate peg.

The problem for China is that these solutions are all non-sustainable.

China cannot keep the capital account closed without damaging badly needed capital inflows. Who will invest in China if you can’t get your money out?

China also cannot maintain high interest rates because the interest costs will bankrupt insolvent state owned enterprises and lead to an increase in unemployment, which is socially destabilizing.

China cannot maintain a strong yuan because that damages exports, hurts export-related jobs, and causes deflation to be imported through lower import prices. An artificially inflated currency also drains the foreign exchange reserves needed to maintain the peg.

Since the impossible trinity really is impossible in the long-run, and since China’s current solutions are non-sustainable, what can China do to solve its policy trilemma?

The most obvious course, and the one likely to be implemented, is a maxi-devaluation of the yuan to around the 7.95 level or lower.

This would stop capital outflows because those outflows are driven by devaluation fears. Once the devaluation happens, there is no longer any urgency about getting money out of China. In fact, new money should start to flow in to take advantage of much lower local currency prices.

There are early signs that this policy of devaluation is already being put into place. The yuan has dropped sharply in the past month from 6.45 to 6.62. This resembles the stealth devaluation of late 2015, but is somewhat more aggressive.

The geopolitical situation is also ripe for a Chinese devaluation policy. Once the National Party Congress is over in late October, President Xi will have secured his political ambitions and will no longer find it necessary to avoid rocking the boat.

China’s President Xi Jinping awaits appointment to a second term at the 19th National Congress of the Communist Party of China, starting October 18. His reappointment is a foregone conclusion.

China has clearly failed to have much impact on North Korea’s nuclear weapons ambitions. As war between North Korea and the U.S. draws closer, neither China nor the U.S. will have as much incentive to cooperate with each other on bilateral trade and currency issues.

Both Trump and Xi are readying a “gloves off” approach to a trade war and renewed currency war. A maxi-devaluation of the yuan is Xi’s most potent weapon.

Finally, China’s internal contradictions are catching up with it. China has to confront an insolvent banking system, a real estate bubble, and a $1 trillion wealth management product Ponzi scheme that is starting to fall apart.

A much weaker yuan would give China some policy space in terms of using its reserves to paper over some of these problems.

Less dramatic devaluations of the yuan led to U.S. stock market crashes. What does a new maxi-devaluation portend for U.S. stocks?

We might have an answer soon enough.

Draghi's Dilemma - Why Is the Euro Still Gaining Against the Dollar?

Authored by Daniel Lacalle via The Mises Institute,

The primary purposes of the incorrectly named “unconventional monetary policies” are to debase the currency, stoke inflation, and make exports more competitive. Printing money aims to solve structural imbalances by making currencies weaker.

In this race to zero in global currency wars, central banks today are “printing” more than $200 billion per month despite that the financial crisis passed a long time ago.

Currency wars are those that no one admits to waging, but everyone wants to fight in secret. The goal is to promote exports at the expense of trading partners.

Reality shows currency wars do not work, as imports become more expensive and other open economies become more competitive through technology. But central banks still like weak currencies —they help to avoid hard reform choices and create a transfer of wealth from savers to debtors.

The Euro Rallies

So how must the bureaucrats at the European Central Bank (ECB) feel when they see the euro rise against the U.S. dollar and all its main trading currencies by more than 12 percent in a year, despite all the talk about more easing? The ECB will keep buying 60 billion euro a month in bonds, maintain its zero interest-rate policy, and keep this “stimulus” as long as it takes, until inflation growth and GDP growth are stable.

Contrary to the wishes of the ECB, however, a strong euro is justified for several reasons.

The European Union’s trade surplus is at record highs, and, 75 percent of Eurozone trade happens between Eurozone countries. Higher exports and the continued recovery of internal demand in European member countries strengthen the euro.

The perception of weakness of the U.S. government and its inability to push through key reforms. This has weakened the dollar and by definition strengthened the other two large trading currencies, the euro and the Japanese yen.

And another important factor is the relief rally after the French and Dutch elections. The fears of a Euro breakup have been eliminated, or at least delayed, as pro-EU political parties won.

The Problems With a Strong Euro

However, a strong euro has very significant implications for the EU economy and the ECB’s policy.

The strong euro puts exports to its main outside trading partners - the United States (20.8 percent of exports in 2016) and China (9.7 percent) - at risk. Despite the ECB’s extreme monetary policy and a euro trading almost at parity with the dollar, exports to non-EU countries have stalled since 2013. GDP growth estimates for 2018 are falling due to a lower contribution of net exports.

The currency also has a high impact on tax revenues in Europe. The correlation between the euro–dollar exchange rate and the earnings estimates of the largest multinationals represented in the Stoxx Europe 600 Index is very high.

According to our estimates, a 10 percent rise of the euro against the dollar is equivalent to an 8 percent drop in earnings and leads to lower corporate tax revenues. From an investment perspective, as earnings drop, the European stock market goes from being relatively cheaper to becoming more expensive.

Investors and economists need to pay attention to these factors. If the euro continues to strengthen, the EU economic recovery is at risk. So the Eurozone is stuck between a rock and a hard place. It cannot stop the stimulus because deficit spending governments cannot live with higher financing costs, and increasing the stimulus to weaken the currency simply doesn’t work anymore.

The only way out is structural reforms, but most governments are afraid of them even in good times, let alone when the going gets tough.

Rickards: "There Are Three Things Going On With Gold Right Now"

Authored by Craig Wilson via Daily Reckoning blog,

Jim Rickards joined Kitco News and Daniela Cambone to discuss the latest news and analysis from gold markets, geopolitics and even bitcoin.  The Wall Street veteran took on the bigger picture facing metals investors and what could be just around the corner in a bubbling market.

Jim Rickards is the editor of Strategic Intelligence and is the New York Times best-selling author of The Road to Ruin. Rickards’ worked on Wall Street for decades and has advised the U.S intelligence community on international finance, trade and financial warfare.

When asked why certain geopolitical tensions have greater impacts on gold and hard assets than others Rickards remarked, “There are two things going on,

"... first is that the North Korean missile threat goes from high tension to back down again. This is a very serious threat and we are headed for war with North Korea. While I don’t know what it will take to not just get gold to go up but stocks and other sectors, ultimately markets are going to be impacted.”

“People seem to have very short attention spans but that’s not how to think about it. It’s possible to see that Kim Jong-un is not deviating from his path to get nuclear weapons, the U.S will not allow it. There’s no middle ground there. It would be great if we could have diplomacy. I think we should also ratchet up sanctions on China. But I don’t see either of those happening.”

“Don’t underestimate the extent to which gold is being impacted by hedge funds, leverage players, and others that are in the mix for the current high in gold. They don’t really care if it is gold, soybeans, etc. but it is simply another commodity. They receive a nice profit with tight profits, tight stops.”

“The bigger picture to look as here is that gold hit an interim low last December and has been grinding higher ever since.  Now gold is up over $200 an ounce and is one of the best performing assets in 2017. There’s a pattern of higher highs and shows a very positive occurrence.”

Gold and Weak Dollar Environment

The interviewer then shot back at Rickards asking whether the price and actions in the market always come back to the U.S dollar? The best-selling author and economist responded, “This all relates to currency wars. I think of gold by weight.”

“When most people look at the cost of gold they relate it to the dollar. That gives the dollar a privilege to say that it is the way to count everything. It is also possible to count gold in euro, yen or even bitcoin. I think of gold as money. These are all just cross rates. When I see a higher dollar price for gold, I think of the dollar as being weaker. Likewise, if I see a lower price for gold it just shows that gold is constant and the dollar got stronger.”

“There are three things going on right now in gold. There’s a fear trade, there’s technicals with supply shortages and ultimately a weaker dollar. If you want to know where the dollar price for gold is going, ask yourself where the dollar is headed. As the dollar gets weaker due to Federal Reserve Chair Yellen’s plan to tighten rates into weakness. We’re getting disinflation, not inflation and the desire from the Fed is a weaker dollar.”

When The Street’s Daniela Cambone prompted Rickards on the rally in gold and whether it would be rejuvenated he leveled,

“I expect to see gold hit $5,000 and eventually to $10,000 an ounce. Maybe not tomorrow or a couple of years but that is the fundamental price of gold as money.”

“In a recent conversation with legendary commodity investor Jim Rogers he indicated to me was, ‘nothing goes to that level without a 50% retracing before it resumes its path upwards.’ Moves happen very fast. The question is, what are the catalysts that could take it higher?”

Is Bitcoin Stealing Gold’s Thunder?

Speaking on catalysts and what could shake the gold market the interviewer then asked whether Bitcoin could have a significant impact. Rickards pushed back,

“Bitcoin is a very small market cap compared to gold. I don’t think it has much impact on gold and looks like a bubble right now.”

“As someone who has been around Wall Street a long time I’ve seen a lot of different tricks of the trade and frauds that come and go. I am seeing all of the various schemes in bitcoin right now. There’s good forensic evidence that there are people doing wash sales right now and the suckers don’t know they are getting sucked in. Gold is still the ultimate safe haven.”

German Gold and ‘Weird’ Commodity Movements

Recently, Germany moved to reacquire its gold being held within the Federal Reserve system. Rickards latest analysis on the situation detailed that,

“In 2013 the central bank in Germany said it wanted its gold back from the UK, France and the US. Here’s the thing, Germany does not want all of its gold back.”

“As it is going through its election cycle, there are specific factions of the German government that are pushing to get German gold back to domestically being held. The German elections are in mid-September, it is not a coincidence that this happened just before that. It was to appease political dynamics as well as leasing development of gold.”

Looking internally, the recent visit by Treasury Secretary Mnuchin to the US Mint in Fort Knox stirred many commodity investor analysts. Rickards offered,

“I was shocked to see the visit. It is rare and only the third time that a Treasury Secretary has visited since the 1930’s.”

“The other thing that is strange about the visit is that the monetary elites don’t want to pay any attention to gold. Several years ago Fed Chair Bernanke was asked about gold and he replied that it is given attention because of tradition. The reason that this official visit matters now is that when gold is being given public attention by government leadership, it enhances the value of gold as a monetary asset. They don’t want the general public to pay attention to gold. The question is, why did he do it and tweet out the visit?”

Finally, speaking on the mounting complexity of issues facing the American government Rickards warned that gold could be well positioned for the remainder of Fall. Rickards sets up,

“We’re coming up against a debt ceiling and budget train wreck. The US budget is at D-Day at the end of September. Separately, the Treasury is literally running out of cash. The government will have to raise the debt ceiling for the Treasury and it will need to, at the very least, pass a continuing resolution.”

“The Treasury has a trick up its sleeve. In 1973, the gold on the books of the Treasury is officially valued at $42.22 per ounce. It would be possible to go mark it to the market just like a hedge fund does. The Treasury could raise the value to a raised price and that difference between $42.22 and the heightened amount would only require a certificate to the Fed for money.”

“That is all under the Gold Act of 1934. The move could open up hundreds of billions of dollars out of thin air just by remarking gold. While I am not saying this is going to happen, it is an option that they have available.”

Is North Korea The Excuse China Needs To Launch Monetary Armageddon?

Authored by Mark St.Cyr,

If one were only to get their “news” via the main-stream media outlets, it wouldn’t be wrong to assume when it came to the understanding of what is really going on across the globe, along with the consequences, most haven’t a clue. This point is made manifest with no greater example than the elections currently taking place in France.

I’m sorry, but the French election doesn’t trump, to all but exclusion, the potential for the breakout of WWIII. That is – unless you’re the main stream media. Yes, one has the potential for near immediate electoral upheaval (i.e., A potential Frexit, and possible finality for the E.U. experiment.) However, the other has the potential for a near immediate global war. That, of course, is the current standoff with N.Korea. And the reaction via the main-stream media? (Insert most recent Kardashian escapade here.)

Not to belittle the French elections and their possible consequences should the results go awry for the entrenched bureaucrats (not to mention the financial markets.) There is another standoff which may bring even more immediate consequences than the other.

Currently the Korean peninsula is in play much the same way Cuba was during the Kennedy administration known as “The Cuban Missile Crisis.” The overall situation and its possible consequences for missteps are eerily similar.

Missiles have been moved onto the peninsula in what can only be described as “outrage” via not only N. Korea, but also China. Whether or not one agrees with the move (along with the stationing of war ships off the Korean coast) as to send a message to Pyongyang to cease all provocation via its nuclear ambitions is irrelevant.

The real player (and the one to pay attention too) in this standoff is China. And how they go about resolving this issue at its doorstep. Both internally, as well as externally.

Make no mistake: China is not just juggling one possible conflict, it is also currently fighting another within its own borders. For China is simultaneously on the precipice of an another possible disaster. i.e., An outright monetary disaster of its own making which needs to be resolved with the same immediacy as this external one.

I’m of the opinion this kerfuffle with N. Korea may be the catalyst which drives China to either embark on an outright kinetic posture against the West to resolve. (e.g., If no one backs down or worse) Or – will be the inflection point as to allow the monetary fallout within its financial markets to begin in earnest. Crippling the entire global economy in ways not fully understood (or envisioned) by many, especially “The West”, in what may be akin to a “First Strike” monetary (rather than kinetic) action.

Aside from the obvious “trigger” events that could arise as I stated in the above. (e.g., N. Korea) There are a few other events which when taken as a collection, rather, than just their stand alone value, portend for far further cracking in the facade that is China.

Since we’re in the middle of a possible armed standoff the analogy of “Did China dodge a bullet?” seems fitting when juxtaposed to the recent tightening into weakness launched in earnest via the Federal Reserve.

As strange as anything resembling “normal” monetary effects have been, e.g., Central banks buying equities. One of the latest has a few scratching their heads, and it’s this: As the Fed. hiked not just once, but twice in 90 days, and, is signaling even more along with a reduction of its balance sheet – the $Dollar has weakened.

There are far too many factors to list as to what might be the catalyst. Yet, what is clear (and the only thing that matters currently) is that this manifestation has subsequently given China some form of “borrowed time” when it comes to the Yuan. For if the $Dollar had strengthened as it has during such cycles? The Yuan would be in a world of depreciating hurt.

Back in October I penned the following, “Why All The Yawning Over The Yuan?” And in it I made the following point. To wit:

“Now some will think “Maybe there’s no concern because the politburo has it under control?” It’s a fair response, but there’s a problem inherent with the answer, or answers.

First: If the Chinese are doing it in a “controlled” type manner, it reeks of “currency manipulation” tactics for others (think U.S. presidential politics as of today) to latch onto and build support, as well as strengthen a case for retaliation. i.e., placing tariffs, etc, etc.

If you think about it from the Chinese perspective: that would mean you were openly, and intentionally goading as to fuel some version of a trade, or currency war. When you come at it using that thought process; it just doesn’t make sense. Both from a tactical standpoint, as well as political. Hence lies what maybe even a more troubling scenario. e.g., They’ve lost control.

The only other reason more troubling than the first – is the second. For it is here where things become quite precarious, as I’ve stated many times: “The currency markets are where you must keep your eyes and ears affixed. It’s where the real games are played and won.” And losing control of one’s currency has implications for all others, both warranted, as well as unintended. And it seems this latter scenario might be more on point than the former.”

Where does the relationship between the Yuan and the $Dollar now stand? One would think with such a sell off currently taking place within the $Dollar market that the cross-rate should be in a much more manageable area for the politburo than before all things being equal, correct? Hint: It’s not. Again, to wit:

As one can see by the chart above we are currently hovering at the 6.900 range. That’s important not just for its “spitting distance” away from the all important psychological 7.000 level, but rather, how (and why) it’s there at all.

All things being equal as the $Dollar had strengthened it put pressure on the Yuan. That pressure was/is wreaking havoc within China exacerbating the already near unmanageable capital flight taking place which shows no sign of letting up as evidenced by the chart above. For the higher the cross-rate ascends – the greater the issues weigh on the Chinese politburo via capital flight and more. And which lies-the-rub…

For if the index is rising as the $Dollar is weakening? (as it is currently) That means the Yuan is losing value far faster than it was only months ago. And that’s a very, very, very (did I say very?) big problem for the current monetary status quo. Not to mention the global economy in general.

The current financial underpinnings within the Chinese economy are once again under pressure in ways very few understand. With that said all one needs to watch as to perceive significant clues into the health of its underpinnings is the price stability in commodities. For much of China’s internal, and interwoven financial constructs for collateral are based on them. And one of the main players of that is iron ore. And guess what? Hint: Prices are/have collapsed at a precarious pace.

The easiest way to categorize the relationship of commodity prices and the financial underpinnings within China is this: Commodities are the collateral and pricing foundation to much of China’s financial obligations – as real estate values are to MBS and all their counterparts. Yes, much of China’s financial problems are now with real estate, but what all that real estate was built and financed on was? Hint: Commodity collateralization. (Think CDS/MBS times a factor of 1000, if not more.)

Now you have some idea of just how massive this problem is.

Just remember what a sudden (like in 2007/08) real estate value collapse can do (or did) to an economy, and you have the same scenario in earnest via commodity prices currently happening in China, where the full effects (let alone realizations) of such have yet to even be calculated, never-mind felt.

Add to this the current enactment of steel tariffs placed only weeks ago by the U.S and you know what you also get? Hint: An even more ticked-off Beijing. Again: All this in conjunction as some U.S. steel warships hold fast off the Korean coast threatening to possibly launch a first strike upon its next door neighbor and so-called Sino-influenced “underling.”

If the politburo decides that there is no other way (and easier timing for a scapegoat) than now as to suddenly devalue the currency and put a world of financial hurt squarely on the West (and the U.S. in-particular) while simultaneously using all the turmoil as to hasten the pace (and possibly secure the position for more SDR influence) the table for such a move has probably never been set so neatly, so perfectly, and so probable as it is today.

Waiting to see if the $Dollar reverses and brings the hurt on in ways that are out of the politburo’s control or sphere of influence will not be seen as “prudent” by anyone within the Chinese authority. “Waiting” from their viewpoint might be the last thing they can consider, especially since “warships” and “missiles” are now needed to be factored into the immediacy for monetary decision-making.

They may decide to act, and act sooner, rather than later.

No matter what happens in France or N.Korea.

SNB Spent $68 Billion On Currency Manipulation In 2016

While Donald Trump has repeatedly expressed his displeasure with China for manipulating its currency, he appears to have recently figured out that over the past 2 years Beijing has been spending hundreds of billions in dollar to strengthen, not weaken, the Yuan and to halt the ~$1 trillion in capital flight from China. But while everyone knows that the biggest currency manipulation in the world, and perhaps the Milky Way galaxy is Japan, which now owns 40% of all JGBs in its ongoing attempt to pressure the Yen lower and explains why Abe was trembling when he met with Trump, terrified the US president would tell him to stop, one place where Trump may want to look is Europe"s famously "neutral" country, which however continues to be quite bellicose when it comes to currency warfare. Overnight, the SNB announced that in 2016 it spent 67.1 billion Swiss francs, or $67.6 billion, to purchase foreign currencies in an effort to weaken its currency.

The amount, published in the central bank’s annual report on Thursday, was roughly CHF20 billion lower than the 2015 total of 86.1 billion francs and a record of 188 billion spent in 2012. What is notable is that in 2015, the Swiss National Bank ended its 1.20 EURCHF peg, which ended up costing the SNB tens of billions in FX losses.

As shown in the chart below, the SNB has used interventions for the better part of a decade to keep the franc, Europe"s preeminent flight to safety currency, in check and lessen the risk of deflation. After it gave up its currency cap in early 2015, the SNB has also relied on a negative deposit rate to counter appreciation pressure. It reaffirmed that two-pillar policy stance last week.

Additionally, as part of its annual report, the SNB reported that at the end of 2016, the SNB’s assets hit a record CHF 747 billion, compared to CHF 641 billion the previous year, higher than the country"s total GDP. The central bank"s assets consisted almost exclusively of currency reserves, that is gold and foreign currency investments. Currency reserves were up by CHF 89 billion year-on-year to CHF 692 billion, principally due to inflows from foreign currency purchases and valuation gains.

And since the SNB is the only central banks which admits it is an aggressive hedge fund, it also reports both the composition of its balance sheet and the return on assets, and in 2016 it generated a profit on currency reserves of 3.8%. Meanwhile, returns on gold and foreign exchange reserves were 11.1% and 3.3% respectively.

What is paradoxical is that despite gold generating the SNB"s highest return not only in 2016 (11.1%) and over the entire 2002-2016 period, at 6.5%, the central bank has been aggressively reducing the relative size of its gold-denominated assets over the past 7 years, mostly as a result of purchases of USD-denominated stocks and bonds.

In 2016, both fixed income investments and equities contributed to the SNB"s bottom line. On the other hand, the slight appreciation of the Swiss franc reduced the return.

The SNB also revealed that in 2016, the SNB held 20% of its foreign exchange reserves in the form of equity investments. Measured in Swiss francs, the average annual return on equities since their introduction in 2005 has been 2.8%; the return on bonds has averaged 0.7%.

Finally, for those confused that the SNB is so open about its purchases and holdings of mostly US stocks, this is how the central bank justifies its policy of active stock management:

The contribution of equities to preserving the value of the currency reserves and building the SNB’s equity base has thus been very substantial during this period.

We look forward to how this boilerplate language will change after the next equity market crash which will wipe out tens of billions in "value" from the SNB"s balance sheet.

Back From Never Gone: CURRENCY WARS

In the previous episode of the currency wars, a few years ago, the Euro-Dollar exchange rate was in the spotlight. This has now completely disappeared to the background and whilst the countries of the Eurozone must be pretty happy with the weak currency (which boosts the export and increases the demand for domestically produced goods), the United States are less than happy as it weakens the position of the country on the export market.

Source: Tradingeconomics

You might have missed it when the mass media were falling over themselves to crucify president Trump, but we had the impression currency wars, and protecting the position of the United States on the world market were pretty high on his ‘to do list’ after decades of huge trade deficits. As you can see on the next image, there clearly is a huge discrepancy in the trade numbers between China and the United States. A substantial trade deficit, which has been nipped in the bud by China using their hard dollars to purchase US Treasuries.

Source: Danske Bank

Whereas the president was definitely pointing fingers at China during his election campaign, he seems to have been softer after a recent call with the Chinese president.

Does this mean the USA and China are now best buddies again? Probably not. It’s far more likely the president has realized he won’t be able to get much done when he gets in a direct confrontation with China. His staff has now launched a ‘test balloon’ and widened the scope of the currency manipulation investigation. Instead of singling out China, the White House will now be using a more general approach, and has even singled out Germany.

Source: Danske Bank

In order to be able to ‘sell’ this idea to concerned countries and entities, the Trump administration might present its own ‘alternative facts’, according to the Wall Street Journal. Even though the trade deficit between the United States and China is very clear in the previous image, it’s entirely possible the White House will introduce a new standard to calculate the trade deficit, to increase the deficit numbers.

According to a paper published by the Trump camp during the election campaign, China was really the main focus of the Economic plan. According to the paper; ‘In a world of freely floating currencies, the US dollar would weaken and the Chinese yuan would strengthen because the US runs a large trade deficit with China and the rest of the world. American exports to China would then rise, Chinese imports to America would fall, and trade should come back towards balance’.

Source: The Trump Economic Plan

That’s an absolutely accurate description, and even in the white paper, the Trump camp looked to things on a larger scale instead of focusing on China. Even the European Monetary Union and specifically Germany were singled out as examples of ‘currency manipulators’.

So don’t be surprised if the White House suddenly announces a plan to use a new method to calculate the trade deficits, in order to make the deficits appear to be larger than they really are. And this could absolutely re-shape the world and increase the impact from currency exchange rates. This doesn’t mean things will definitely change for the worse, but it’s always a very thin line when you’re dealing with powerful trading partners.

It will be difficult to create a win-win situation, but let’s hope it doesn’t turn into a lose-lose situation, as that could cripple the worldwide economy again.

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Trump's Currency War Hit List - Is Canada a Target?

A lot has been said about the potential for a US-Canada trade war. And judging from a lot of what’s happened, especially with respect to a strengthen USD, it looks like currencies may be what could light the spark to the barrel of gunpowder.

THE BACKDROP

The fact of the matter is that a strong dollar isn’t necessarily good for all sectors of the U.S economy. A strengthening dollar can have a “deleterious feedback loop” for export-oriented companies, since it means their products are now more expensive for foreign customers to buy. The net effect is that US-based manufacturers could suffer tremendously – including in terms of having to cut jobs and downsize their operations.

Another sour pill to swallow for Team Trump, if the USD continues to rise against major currencies, is the fact that foreign corporations, such as German pharmaceutical giant Bayer or Euro aerospace behemoth Airbus that do significant business in the U.S, profit more than U.S corporations selling overseas.   

And that’s exactly contrary to the platform of ‘Buy America”, job creation and boosting exports that Mr. Trump ran on during his campaign. So when a country’s currency weakens, in relation to the USD (i.e. the Greenback grows comparatively stronger), the war hawks in the Trump administration sit up and take notice!

WAR CLOUDS GATHER

Since November 2016, the PowerShares DB US Dollar Index (UUP), which tracks the USD against a basket of world currencies, has been on a steady increase, from $25.59 (Nov 11, 2016) to a high of $26.70 (Dec 20th, 2016). Granted that some of those gains have been paired back by Mr. Trumps jawboning statements ($25.89 at the time of writing); but it still represents a nearly 4.8% rise over a 6-month period ($24.71 on Aug 15, 2016).

Back on the campaign trail, Mr. Trump had already started beating the war drums. However, his war cries were largely directed towards China, and to his neighbour to the South – Mexico. But the battle cries keep getting louder. More recently, Trump senior trade advisors have levied similar accusations against Germany, and have also been severely critical about the Japanese currency “malpractices”. 

CANADA IN TRUMP’s CROSSHAIRS?

Things could get messy for Canada’s economy, if the same rhetoric is applied to the US dollar’s performance versus the Canadian dollar. Back in November, the USD traded at $1.34 per CAD, with “Trump Talk” pushing it up in strength to $1.36 (Dec 27, 2016). At the time of writing, the Greenback has lost some steam, trading at $1.31 per CAD – roughly just about where it traded 6 months ago.

So what will a stronger USD mean for the Canadian economy, if the Trump Administration decides to label Canada a “Currency manipulator”? What could a currency war with the US mean for Canada?

Well, the US is Canada’s largest trading partner, and any strengthening of the Greenback against the Loonie is positive for Canadian exporters, but negative for the US – since it tilts the balance of trade. Mr. Trump may therefore do all he can to ensure the dollar does not gain too much strength versus the CAD. One way to retaliate might be to target specific Canadian industries, like Energy, Forestry and Auto. 

In terms of specific impacts to Canadian economy, New Brunswick, Alberta and Ontario will be the worst three provinces to be hit by any currency war fallout; that’s according to TD Economics analysis. These three provinces have exports that are significantly exposed to the US, and any retaliatory measures by the US, such as a border tax, will have deleterious effect on provincial economies.

With respect to specific industries that could become casualties of any currency-initiated trade war between the two neighbours, based on TD Economics figures (Share of total goods exported to the US), it is likely that Auto Parts, Regulatory Consultants, Consumer goods and Forestry products will be the hardest hit.

SILVER LINING?

Searching for a sliver of sunlight peeking out of the dark currency war clouds, Trump advisors have assured Canada that, should trade and currency be up for discussions and renegotiations, then Canada may have nothing to be worried about from the new administration. However, as has been the hallmark of the new occupant at the Whitehouse, what’s said (or promised) and what’s actually delivered might be two entirely different things.

Brace for it…the USD-CAD currency wars might just be about to begin!

Schauble Agrees With Trump That Euro Is "Too Low" For Germany, Blames Mario Draghi

In surprising comments that may rekindle a verbal currency war between president Trump and Europe, German finance minister Wolfgang Schäuble told German newspaper Tagesspiegel that in his opinion the Euro is "too low" for Germany, echoing criticism from Trump"s trade advisor Peter Navarro, who last week told the FT that Germany was exploiting its US and EU partners by using a “grossly undervalued” euro to create a vast trade surplus. The comment placed Germany, alongside China and Japan, in a category of countries that the Trump administration has accused of currency manipulation for competitive advantage.

As the FT reports on Sunday morning, Schauble acknowledged that the ECB had to set monetary policy for the eurozone as a whole, but said: “It is too loose for Germany.” A recent chart from Morgan Stanley confirms that on a PPP basis, the EUR is over 40% undervalued for exporting and current surplus powerhouse Germany on a standalone basis, however for many of Europe"s peripheral countries it still remains expensive.

What was more curious about Schauble statement is that the German finance minister blamed the European Central Bank for the low exchange rate.

“The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position,” he told Tagesspiegel. “When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus . . . I promised then not to publicly criticise this [policy] course. But then I don’t want to be criticised for the consequences of this policy.”

However, as events last week showed, an otherwise hawkish Germany being criticized for ECB"s monetary policy is preicsely what happened.

Schäuble pointed out that Germany was not able to set exchange rate policy and pinned responsibility for the euro’s weakness against the dollar on the ECB. The German finance ministry was “not an ardent fan” of the ECB’s policy of quantitative easing that had helped to weaken the single currency.

In other words, if Trump wants to blame anyone for the weak Euro - according to the German - he should direct his anger at Mario Draghi.

As the FT notes, Germany"s Ifo Institute recorded a trade surplus of nearly $300bn last year, outpacing China by more than $50bn to hold the world’s largest trade surplus. Critics not only in Washington, but also Brussels have called for Germany to reframe its fiscal policy and stimulate domestic demand to increase imports. So far, however, any European criticism of Germany has been mostly lip service, which is why the arrival of Trump as a vocal critic of German trade policy has sparked renewed concern in Germany.

Additionally, in the interview Schäuble questioned why a US president would want to divide Europe given that the continent “is closer to them than anybody else in the world”. He added he did not believe that Mr Trump was seriously trying to split up Europe, but he was “testing” a lot.

Despite implicitly agreeing with Trump that the ECB is at fault for keeping the Euro too low, Schauble scorned U.S. accusations that Europe’s biggest economy is using an undervalued currency as a tool to gain unfair trade advantages, saying aides to President Donald Trump apparently don’t understand that the euro’s exchange rate isn’t set by the government.

“In America, the savvy advisers to the new president are now concerned with the question of why the German economy is to a certain extent competitive and performing well,” Schaeuble said on Friday in Saarbruecken, cited by Bloomberg. “They have not entirely understood, or at least not everyone, that the German federal government isn’t responsible for monetary policy in Europe, but someone else.”

As per his latest clarification on Sunday, that "responsible someone" is Mario Draghi.

Schauble added that “the problem is that we have a structure in the monetary union, a common currency without a common finance and economic policy, and that member states - the ECB isn’t tiring of saying that - aren’t doing what they committed to,” Schaeuble said. “One of the big problems of monetary policy” is how to begin an exit from the “unusual” stance without “risking bigger economic upheavals in other European countries,” Schaeuble said.

Schäuble’s Sunday comments on monetary policy comprise his latest attack on the ECB’s easy money policies. Last year, the hawkish finance minister blamed Draghi for “50 per cent” of the success of the populist rightwing Alternative for Germany party. Schäuble and others on the conservative wing of Chancellor Angela Merkel’s ruling CDU/CSU bloc are concerned that as well as profiting from the refugee crisis, the Eurosceptic AfD, which wants an end to the common currency bloc in its present form, is winning support from voters worried about the euro’s stability and the low interest on their savings.

Draghi, meanwhile, was on Friday hailing efforts at European unification, defending the common currency and applauding some of Germany’s labour reform policies in a speech given in Ljubljana, Slovenia.

“There are some today who believe that Europe would be better off if we did not have the single currency and could devalue our exchange rates instead,” Mr Draghi said. “But, as we have seen, countries that have implemented reforms do not depend on a flexible exchange rate to achieve sustainable growth. And for those that have not reformed, one has to ask how beneficial a flexible exchange rate would really be. After all, if a country has low productivity growth because of deep-rooted structural problems, the exchange rate cannot be the answer.”

While it remains to be seen if Trump will pivot his attacks away from Germany and to the rightful source of Europe"s weak currency, the European Central Bank which continues to monetize a record amount of debt instruments, now owns over 10% of Europe"s entire stock of corporate debt, and whose balance sheet has ballooned to over 36% of the Eurozone"s GDP...

 

... it would certainly make for a welcome change for Trump to launch an occasional twitter attack at the ECB, instead of focusing all his social media energy on the US Judicial System, although with his cabinet being comprised of numerous former coworkers of Mario Draghi, who would rather keep the ECB"s role in facilitating Germany"s surplus under wraps, it does not appear too likely.

Is A US-German Trade War Imminent?

In the aftermath of the stunning statement by Trump"s top trade advisor, Peter Navarro, who indirectly warned that a currency, and therefore, trade war with Europe may be imminent after he told the FT what everyone else knows but is unwilling to admit, namely that Germany is using a “grossly undervalued” euro to which was like an “implicit Deutsche Mark” whose low valuation gave Germany "an advantage over its main partners", analysts are asking if this is the precursor to a third front in Trump"s currency wars, which most recently included China and Mexico.

While one look at the rising European currency reserves driven by the soaring current account surplus, mostly out of Germany, suggests that Navarro"s allegation that Germany is a currency manipulator does have some validity. But isolating the problem is only the first step: a full blown trade war with Europe, or Germany, would have profound consequences not just for the two counterparts, but the rest of the world.

Here are some further thoughts on this red hot topic, courtesy of SMI.

Is a U.S.-German Trade War Looming?

U.S. President Donald Trump"s policies have begun to take shape, and Germany"s strategy for reacting to them has already been made clear. Germany has long considered a strong alliance with the United States to be a cornerstone of its foreign policy, and it will do everything it can to protect that partnership. However, Germany will also take steps to protect its massive current account surplus — now the largest in the world — from becoming the next target of punitive trade measures.

Over the past five years, Germany"s current account surplus (a figure that includes the country"s trade balance) has almost doubled, reaching 256.1 billion euros ($274 billion) in 2015. Trump has accused Germany of not doing enough to increase its imports while having such a sizable trade surplus, and in October, the U.S. Treasury Department listed Germany as a country to watch because of its current account surplus. Germany"s own eurozone peers have accused it of encouraging saving over consumption, slowing the currency area"s recovery in the process.

Nevertheless, the United States can take a trade war with Germany only so far. Under U.S. law, Washington can introduce temporary safeguards to protect domestic industries threatened by certain imports. But these safeguards can target only imports, rather than specific countries, and Germany would immediately challenge them in the World Trade Organization. Should the Trump administration try to single out Germany, it would have to successfully argue that Berlin is supporting German exporters unfairly and then slapping countervailing duties on German exports.

If the United States were able to effectively target German exports, Berlin would take its appeal to the American people. In theory, it could argue that higher tariffs on German products would only increase costs for U.S. consumers. Also, Berlin will remind American workers that many German companies, including BMW, Volkswagen and Siemens, have U.S. divisions that employ many Americans and use products from U.S. companies in their supply chains.

At the heart of the debate is Berlin"s concern that other parts of the developed world will start to echo Trump"s nationalist rhetoric, posing an existential threat to an export-based economy like Germany"s. Several European political parties have already begun to praise the president"s statements, promising that the next U.S. government will prove that "protectionism works." Germany is terrified by the prospect that these same nationalist forces will gain control of governments in the bloc in upcoming 2017 elections. Additionally, Germany worries that Trump"s attack against the cheap euro could become (or at least be perceived as) an attack against the entire eurozone. Other eurozone members may grow anxious that their participation in the bloc will put them in a protectionist White House"s crosshairs.

2017 Will Be An Important Year For The Currency Wars

Source: ft.com

The past few years, ‘currency war’ was the ‘talk of the town’, but truth be told, there was no real ‘cold’ trade and currency war. In fact, the European Central Bank kept on decreasing its benchmark interest rates when the Federal Reserve took baby-steps to increase its own interest rates again, so we do have to take the previous ‘currency war’ declaration with a mid-sized spoon of salt.

But in 2017, the gloves might come off, as several countries have been warning for ‘expensive currencies’. China, for instance, might become under increased pressure from the Trump administration who will very likely announce and initiate some protectionist measures to boost the domestic economy inside the USA. China also is an easy ‘victim’ as it’s easy to use the country as a ‘target’ when things go wrong in the USA. The statement ‘the US Dollar is overvalued whilst China is keeping its currency rate artificially low’ isn’t coming out of the blue.

Source: The Economist

And of course, China will obviously encounter its fair share of problems as well, this year, as its annual growth rate just continues to decrease, and any protectionist move in the USA will aggravate the situation.

China is clearly worried, as its president, Xi Jinping, was one of the biggest advocates of globalisation and world trade at the recent economic forum of Davos. That’s not unexpected, as China has hands-down been the main beneficiary of the recent push for globalisation in the past sixteen years of this millennium.

Source: ABN AMRO

The country is clearly feeling the pressure on its economic situation, as even though the import growth rate has been picking up again, the export growth remains in the negative territory, pointing in the direction of a global trade pattern which is slowing down. To make things worse, the import growth was predominantly caused by a (temporary?) increase in the import of raw goods to replenish the stockpiles (before the Chinese new year starts).

And the pressure on the Chinese economy is coming from all angles. The real estate market seems to be bracing for (yet another) correction as the local governments have started to tighten the regulations in an attempt to slow down the overheating market. This seemed to be working as there has been a substantial slowdown in the total volume of mortgage applications, but it looks like this was just the first step.

China also had to solve the trilemma of having an independent monetary policy, the free movement of capital and a fixed exchange rate as that’s technically, theoretically and practically pretty much impossible. More measures have been announced and implemented (by suspending the possibility to purchase foreign assets that have no industrial use, and reducing the possibility for citizens to purchase foreign currency.

Source: The Economist

The credit growth rate remains positive and with credit levels increasing towards 300% of the GDP, China can’t afford any missteps as any serious contraction of its growth rates and/or the level of its economic activity could push the country over the cliff, with disastrous consequences.

China will need to keep its currency cheap and will have to work on its relationship with President Trump to ensure a good relationship. Globalisation is key for China, and a slower world trade will hurt the country.

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Silver Dumps, Peso Jumps As Mexican Central Bank Intervenes (Again)

If at first you don"t succeed, intervene again! For the second time today (at midnight ET), Banxico officials confirmed the central bank entered the market to sell US dollars in an attempt to strengthen the peso. Now we await the next Trump tweet to take the peso back down...

As Bloomberg reports, according to a Banxico official who asked not to be identified, the central bank is looking to strengthen Mexican peso.

For now the move is far less impressive - which is odd given the lack of liquidity and an irrational peso buyer...

We have one other question... Is Banxico dumping its silver to receive dollars to sell to buy pesos?

Around $200mm notional of Silver was dumped in those few minutes.

As we noted at their earlier attempt, we can"t really blame Banxico for intervening: with the local population, of which over half lives in poverty, angry and protesting the recent "Gasolinazo", or 20% increase in the price of gas, the crashing currency is sure to send many other prices, especially of imported goods, through the roof while sending much of the population over the edge. Which is why Goldman"s Alberto Ramos agrees that the central bank had to do something:

"In our assessment, some FX market intervention at this juncture is justified since market liquidity conditions became somewhat tighter, the MXN entered overshooting territory (excessively undervalued) and from current levels, significant additional exchange rate weakness, while making exporters even more competitive, can threaten two valuable public goods: price and local financial market stability. A very weak currency can have significant medium-term costs for the broader economy as it is likely to add pressure on inflation and wages (which would over time reduce the cost-competitiveness of the Mexican exporters) and prompt to a tighter monetary stance. Overall, higher inflation/wages and higher rates would be a clear negative shock to the non-tradable sectors of the Mexican economy, for they would not enjoy the exporters (tradable sectors) benefit of a weak currency.

So much for a "brave new world" in which global trade imbalances can be resolved without central bank intervention. If anything, the events from the first 4 days of 2017, in which we first saw a dramatic indirect intervention by the PBOC which sent the overnight CNH deposit rate to the highest ever in a desperate attempt to crush shorts, and then the Mexican direct intervention, have confirmed that 2017 will be very much like 2016 when it comes to central bank intervention, if not more so.

However, as Goldman admits, Banxico made one mistake which explains why virtually the entire post-intervention move has been faded:

In our assessment, if the MXN remains under pressure the authorities should entertain the possibility of using different intervention instruments, such as USD Dollar swaps, for they are not a direct claim on reserves and offer valuable FX hedging protection to the market in a period of significant uncertainty but no large spot market outflows.

There is a problem with using reserves to fight a currency war, one which China is very familiar with:

On the other hand, using USD swaps is precisely what the PBOC shifted to late in 2015 (perhaps as advised by Goldman then too) when it too realized that using reserves was a very rudimentary (if effective) attempt at intervention. The only problem is that it eventually catched up to the central bank, and just like in the case of China which used swaps for about 3-4 months even as the capital outflows persisted, it ultimately had to return to draining reserves for a full blown intervention.

Ironically, even that has failed, and as we have documented extensively in the past 2 months, the PBOC is now scrambling with intraday gimmicks like crushing shorts using deposit rates. That too only works for a while.

Meanwhile, Mexico is caught between a rock and a hard place, because while the currency is depreciating, and the "MXN is now visibly undervalued versus theoretical fundamental fair-value under any of the three model metrics we use" Goldman warns that any further depreciation can undermine the inflation backdrop and/or risk unleashing destabilizing financial forces.

Which is all Trump needs: a several economic crisis just south of the border.

Actually, there is another thing Trump "needs": Mexico launching an all out currency war against the US, whether through reserve draining (which would hit US assets) or USD swaps. Should the central bank intervene on a few more occasions to offset today"s failed revaluation attempt, which the market is now openly mocking, we eagerly await the barrage of tweets that will be launched by the Trump account as the president-elect, having slammed the occasional stock, shifts to FX.

Trump aside, what happens next? Once today"s intervention fails, the Peso is looking at a lot more downside, and as Rabobank"s Christina Lawrence writes,the MXN could fall as far as 23, as there "is little room for MXN relief as Banxico is highly unlikely to provide any lasting support for peso as market is too liquid and Mexico’s reserves will start to evaporate very quickly." Putting trading volumes in context, MXN is the 10th most liquid currency globally with an average daily volume in the spot market of $43b and $112b when including options.

Rabo says that it “expects volatility to rise further and for the skew to continue moving to the right as market participants move to protect themselves from further USD/MXN upside”

Finally, the real message here is that the Banxico’s intervention "may also be seen as sign of greater underlying problems." Bingo.

Why The Mexican Currency Intervention Failed: Goldman Explains

Following the MXN rough start of the year, which saw the Mexican currency tumble to its lowest level ever, the central bank stepped into the FX market this morning by selling about $1 billion USD spot, hoping to break the destabilizing MXN relentless depreciation trend. According to the central bank market operations manager, the authorities are not just seeking to stabilize but to “strengthen the Peso”.

Putting the recent move in the peso in context, the MXN"s Real Effective Exchange Rate (REER) has depreciated 41% since mid-2013 and is now at its weakest level in more than 20 years. In fact, the only time the REER was weaker than it is currently was in the aftermath of the ravaging 1994-1995 "Tequila" economic and banking crisis. That is, the current MXN weakness is unprecedented outside the grip of a major crisis and is also visibly weaker than the level reached during the 2008-09 GFC.

There is just one problem: so far they have failed dramatically, with the peso sliding ever since the intervention, and moments ago almost filling the entire gap.

To be sure, one can"t really blame Banxico for intervening: with the local population, of which over half lives in poverty, angry and protesting the recent "Gasolinazo", or 20% increase in the price of gas, the crashing currency is sure to send many other prices, especially of imported goods, through the roof while sending much of the population over the edge. Which is why Goldman"s Alberto Ramos agrees that the central bank had to do something:

"In our assessment, some FX market intervention at this juncture is justified since market liquidity conditions became somewhat tighter, the MXN entered overshooting territory (excessively undervalued) and from current levels, significant additional exchange rate weakness, while making exporters even more competitive, can threaten two valuable public goods: price and local financial market stability. A very weak currency can have significant medium-term costs for the broader economy as it is likely to add pressure on inflation and wages (which would over time reduce the cost-competitiveness of the Mexican exporters) and prompt to a tighter monetary stance. Overall, higher inflation/wages and higher rates would be a clear negative shock to the non-tradable sectors of the Mexican economy, for they would not enjoy the exporters (tradable sectors) benefit of a weak currency.

So much for a "brave new world" in which global trade imbalances can be resolved without central bank intervention. If anything, the events from the first 4 days of 2017, in which we first saw a dramatic indirect intervention by the PBOC which sent the overnight CNH deposit rate to the highest ever in a desperate attempt to crush shorts, and then the Mexican direct intervention, have confirmed that 2017 will be very much like 2016 when it comes to central bank intervention, if not more so.

However, as Goldman admits, Banxico made one mistake which explains why virtually the entire post-intervention move has been faded:

In our assessment, if the MXN remains under pressure the authorities should entertain the possibility of using different intervention instruments, such as USD Dollar swaps, for they are not a direct claim on reserves and offer valuable FX hedging protection to the market in a period of significant uncertainty but no large spot market outflows.

There is a problem with using reserves to fight a currency war, one which China is very familiar with:

On the other hand, using USD swaps is precisely what the PBOC shifted to late in 2015 (perhaps as advised by Goldman then too) when it too realized that using reserves was a very rudimentary (if effective) attempt at intervention. The only problem is that it eventually catched up to the central bank, and just like in the case of China which used swaps for about 3-4 months even as the capital outflows persisted, it ultimately had to return to draining reserves for a full blown intervention.

Ironically, even that has failed, and as we have documented extensively in the past 2 months, the PBOC is now scrambling with intraday gimmicks like crushing shorts using deposit rates. That too only works for a while.

Meanwhile, Mexico is caught between a rock and a hard place, because while the currency is depreciating, and the "MXN is now visibly undervalued versus theoretical fundamental fair-value under any of the three model metrics we use" Goldman warns that any further depreciation can undermine the inflation backdrop and/or risk unleashing destabilizing financial forces.

Which is all Trump needs: a several economic crisis just south of the border.

Actually, there is another thing Trump "needs": Mexico launching an all out currency war against the US, whether through reserve draining (which would hit US assets) or USD swaps. Should the central bank intervene on a few more occasions to offset today"s failed revaluation attempt, which the market is now openly mocking, we eagerly await the barrage of tweets that will be launched by the Trump account as the president-elect, having slammed the occasional stock, shifts to FX.

Trump aside, what happens next? Once today"s intervention fails, the Peso is looking at a lot more downside, and as Rabobank"s Christina Lawrence writes,the MXN could fall as far as 23, as there "is little room for MXN relief as Banxico is highly unlikely to provide any lasting support for peso as market is too liquid and Mexico’s reserves will start to evaporate very quickly." Putting trading volumes in context, MXN is the 10th most liquid currency globally with an average daily volume in the spot market of $43b and $112b when including options.

Rabo says that it “expects volatility to rise further and for the skew to continue moving to the right as market participants move to protect themselves from further USD/MXN upside”

Finally, the real message here is that the Banxico’s intervention "may also be seen as sign of greater underlying problems." Bingo.