Most Popular
1. Dow Max Drawdown Bear Stock Market 2022 - Accumulating Deviations from the Highs - 21st Feb 22
2.Putin Starts WW3 in Ukraine, Will Use Tactical Nuclear Weapons, China Prepares Taiwan Blitzkrieg - 28th Feb 22
3.World War 3 Phase 1 - Putin WINS Ukraine War! - 25th Feb 22
4.INVESTORS SEDUCED by CNBC and the STOCK CHARTS COMPLETELY MISS the BIG PICTURE! - 10th Feb 22
5.Will There Be A 2024 US Presidential Election? - 3rd Mar 22
6.Gold and SIlver, Precious Metals Sector Is at a Terrific Buy Spot - 6th Feb 22
7.Why Putin Wants the WHOLE of Ukraine - World War 3 Untended Consequences - 6th Feb 22
8.Dow Stock Market Expected Max Drawdown 2022 - 19th Feb 22
9.Stock Market Calm In the Eye of the Inflation Storm - 4th Mar 22
10.M = F - Everything is Waving! Stock Market Forward Guidance - 7th Mar 22
Last 7 days
How Low Could the Amazon (AMZN) Stock Price Fall? - 19th May 22
Bitten by FANG? Clocked by Cryptos? -- 'Air Pockets' Everywhere - 19th May 22
Northern General Hospital Orthopedics Fractures and and Ankle Clinic Consultations Real Patient Experience - 19th May 22
Cathie Wood Goes All in on Teladoc, ARKK INSANE Noob Investing Strategy! - 17th May 22
This is Anything but Positive for US Housing Market - 17th May 22
What Should We Do If There Is No Fed Monetary Policy Pivot? - 17th May 22
All Possible Ways to Earn Free Litecoin - 17th May 22
How low Could the Amazon Stock Price Fall? - 16th May 22
Cathy Wood ARKK INSANITY There is NO Coming Back! - 16th May 22
NASDAQ 100 Stock Market LOWER LOWS & LOWER HIGH - 16th May 22
Sanctions, trade wars worsen US inflation - 16th May 22
AI Tech Stocks Earnings BloodBath Buying Opportunity - 14th May 22
Futures Contract – Trading Crude Oil With USO - 14th May 22
How to Get Kaspersky Internet Security for 80% Discount! Do not Pay Renewal Price! - 14th May 22
Sagittarius A* Super Massive Black Hole Monster at Centre of Our Galaxy REVEALED! - 14th May 22
UK Public Debt Smoking Inflation Gun - 13th May 22
What Happens When the Stock Market Dip Keeps Dipping? - 13th May 22
Biden Seeks Inflation Scapegoats; Gold Advocate Wins GOP Primary - 13th May 22
Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - 12th May 22
The War on Gold Ensures the Dollar’s Downfall - 12th May 22
Crypto Investors Stable Coins TERROR as Terra USD COLLAPSEs towards ZERO, Tether Next! - 11th May 22
INFLATION IS KILLING SILVER - 11th May 22
The Dominant Investing Theme of the Decade - 11th May 22
Is Bitcoin Headed to Zero? - 11th May 22
RECESSION RISKS 2023 - 10th May 22
The Future of the Dollar Seems So Bright It’s Blinding Gold - 10th May 22
Take Advantage When Markets Succumb to Fear - 10th May 22
How to Recognize a Less\ Than Obvious Opportunity (In focus: Corn) - 10th May 22
How to Ensure Financial Stability for Your Family - 10th May 22
The Stocks Stealth BEAR Market - 9th May 22
A Strengthening US Dollar Is A Double-Edged Sword - 9th May 22
Making Wise Investment Decisions - 9th May 22
Ways to legalize a Moving Company - 9th May 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Epic Currency War Battle: Hedge Funds Versus China

Currencies / Currency War Feb 02, 2016 - 05:35 PM GMT

By: John_Rubino

Currencies

George Soros’ successful bet against the British pound back in 1992 remains one of financial history’s epic tales.

The short version of the story begins with Britain linking its currency, the pound, to the German deutschmark via the European Exchange Rate Mechanism (ERM). But Britain’s inflation rate was higher than Germany’s, which created a growing mismatch between the currencies’ real value.


In order to maintain the peg Britain raised interest rates and spent its foreign exchange reserves. But hedge funds, with Soros in the lead, sensed imminent failure and placed big bets against the pound. They were right: After some official bluster and shrill denials, Britain was in the end forced to withdraw from the ESM and devalue its currency, thus making fortunes for its hedge fund tormentors ($1 billion for Soros alone).

Now fast forward to 2016. China has pegged its currency, the yuan, to the US dollar, but as the dollar rises — taking the yuan along with it — China’s economy is slowing down and many believe the only way to stop the slide is to devalue. Some high-profile hedge funds (including an older but apparently still bold Soros) now view China as another Great Britain and are trying for a replay by shorting the yuan.

U.S. hedge funds betting big against China’s yuan

(MarketWatch) – Some of the biggest names in the hedge-fund industry are piling up bets against China’s currency, setting up a showdown between Wall Street and the leaders of the world’s second-largest economy.

Kyle Bass’s Hayman Capital Management has sold off the bulk of its investments in stocks, commodities and bonds so it can focus on shorting Asian currencies, including the yuan and the Hong Kong dollar.

It is the biggest concentrated wager that the Dallas-based firm has made since its profitable bet years ago against the U.S. housing market. About 85% of Hayman Capital’s portfolio is now invested in trades that are expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years—a bet with billions of dollars on the line, including borrowed money.

“When you talk about orders of magnitude, this is much larger than the subprime crisis,” said Bass, who believes the yuan could fall as much as 40% in that period.

Billionaire trader Stanley Druckenmiller and hedge-fund manager David Tepper have staked out positions of their own against the currency, also known as the renminbi, according to people familiar with the matter. David Einhorn’s Greenlight Capital Inc. holds options on the yuan depreciation.

China, of course, isn’t taking this lying down. Remember that its leaders are essentially central planners with at best a vague understanding of markets, who don’t see how private individuals can or should get away with attacking their financial system. This, to them, is a declaration of war.

They point out that they’ve got some weapons, including $3+ trillion of foreign exchange reserves and total control of the regulatory apparatus, and are not afraid to use them. The hedge funds, meanwhile, don’t seem too worried. Fascinating stuff!

But what does it mean for the rest of us? Well, if China is forced to devalue the yuan by the 40% the hedge funds expect (and that fundamentals seem to require), it will have fired not just a bazooka but an ICBM in the currency war. For the world’s second biggest economy to devalue on that scale would send shock waves through Europe, Japan and the US.

In the US, for instance, today’s strong dollar is already creating a corporate earnings recession. A suddenly-much stronger dollar would magnify the problem, at a minimum causing an equities bear market. And the US is the least vulnerable of the three main victims. Europe is already on the edge of an economic/geopolitical/demographic abyss, and a spike in the euro might be the last straw. Japan, meanwhile, is trying to devalue its own currency and would either have to admit defeat and accept deflation forever or respond in kind, with massively-negative interest rates.

To sum up, a big yuan devaluation might force the same decision on much of Asia, Europe and North America — all at once. So instead of a drawn-out, back-and-forth currency war over the next few years, the process would be compressed into just a few trading days.

If, on the other hand, China succeeds in keeping a stable yuan/dollar peg, then some big and highly-leveraged hedge funds will lose a bet they may not be able to cover. Temporary stability in foreign exchange markets will have been bought at the cost of turmoil in the leveraged speculating/money center banking community.

Whoever says finance isn’t fun just isn’t paying attention.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)© 2016 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Raul Ilargi Meijer Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in