• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Financial Services

Yuan, Is 7 the Magic Number?

It appears the People's Bank of China may have put a floor in place for the currency.
By MALEEHA BENGALI
Aug 06, 2018 | 07:47 AM EDT
Stocks quotes in this article: RIO, VALE

As the trade wars escalated last week, investors questioned whether the yuan could break the magic 7 level. As the currency flirted past 6.90, investors were worried that China was more willing to let its currency fall further.

Low and behold, on Friday, the People's Bank of China (PBOC) surprised the markets in a statement that hiked the reserve requirement for foreign exchange (FX) forwards from 0% to 20%, effectively making it much more expensive to bet against the yuan. The currency has fallen 4% versus the dollar over the past month and about 10% since April, a steeper decline than one seen in the 2015 devaluation.

This move caused a sharp rally in the yuan on Friday as traders had a sense of déjà vu post the 2015 devaluation that later saw a massive short squeeze in early 2016, catching everyone by surprise. The mantra most traders hold onto since 2016: Never bet against the PBOC!

If one were to just look at the fundamentals of the slowing Chinese economy, 300% debt-to-GDP ratios and escalating trade war, one would be tempted to short the yuan on a pure macro basis. The cost of carry, or the amount it costs to go short the yuan versus the dollar, has never been so enticing as well. The three-month Shanghai Interbank Offered Rate (SHIBOR) minus the three-month U.S. London Interbank Offered Rate (LIBOR) spread now sits at 60 basis points, down from a high of 320 basis points since start of the year; thus making it a lot cheaper to go short the yuan. But this morning a PBOC adviser said the yuan will not break the 7 level. And there you have it. We have a floor in place for the yuan.

Good, now can we all go back to our day jobs rather than pretending to be Chinese macro FX specialists?

Since the trade war headlines escalated, copper is down 15% from its highs of $7,300 per ton, now trading close to $6,100 per ton. Large-cap copper mining stocks are down 18% to 20%. However, iron ore, the less talked-about step-child of the base metals complex, is actually up 10% since June.

Steel prices have been on a winning streak over the past month given tightening fundamentals as inventories have depleted and production shut down. Iron ore is strong because it is the raw material that is used to make the end product. As steel prices go higher, so does iron ore. But does anyone care or even is looking? Stocks such as Rio Tinto (RIO) and Vale (VALE) , pure iron ore levered mining companies, are down 15% as well. Does this not add up right?

When the market chooses to obsess over macro themes such as a U.S. recession, China slowdown or monetary tightening, the correlation among asset classes moves closer to 1. What this means is that investors and traders do not differentiate among any of the stocks regardless of their fundamentals or the drivers of their earnings. It's classic risk aversion: Sell everything, ask questions later! As the dust settles and people have time to look at their monitors and observe the discrepancies, opportunities tend to appear.

Equities are longer-dated instruments, hence they discount future cash flows. When we are in a bull tape, they tend to outperform, and vice versa underperform in a bear tape. At the end of the day, let's not forget that the top-line drivers of these mining companies are the actual commodities in which they are invested. If iron ore is ticking higher, the mark-to-market valuation of the top line of Vale or Rio Tinto actually will be moving higher as each day passes. The stocks should be re-rating higher, not lower. Either the equity is wrong or the commodity itself. But the latter moves on physical market attributes related to supply and demand and inventory balances. Equities are more a measure of fear and greed over and above fair value, hence the opportunity.

Now that the PBOC has plugged a hole in the yuan leak, investors perhaps can stop obsessing over the level of the yuan and go back to trading their mandates. Over time, correlations should start to ease away from 1 as we start to see differentiation among stocks intra-sector.

There seems to be some institutional flow in the market as the market weeklies show an open below the previous day's lows and closes above the previous day's highs. This tends to be a hint that institutional orders are coming into the market over the course of the day with retail sellers at the onset.

Over the space of a month, we have seen the S&P 500 gap down twice below the previous two days' lows, then finish above those days' highs. That shows some eagerness to buy the market. Since 1993, over the course of a month, that has only happened 14 times, of which 13 of those occasions saw higher prices three weeks later.

August tends to be a quiet month. After a horrendous month of volatility and uncertainty, portfolio managers have gone away for the holidays. Not wanting their phones to go off on the beach, they probably are licking their wounds and have unwound their bets. Will they pay for it in September when they return? #mindthegap #paintradehigher #justsaying

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Bengali was long RIO.

TAGS: Currencies | Markets | Financial Services | Investing | Basic Materials | China | FOREX | How-to | Risk Management | Stocks

More from Financial Services

That SoFi Technologies Improved So Quickly Is No Surprise: Here's What I'd Do

Stephen Guilfoyle
Jan 30, 2023 11:15 AM EST

Here's the most important thing we've heard from SOFI, maybe ever.

T.Rowe Price Receives a Quantitative Downgrade to Confirm Its Weak Charts

Bruce Kamich
Jan 30, 2023 8:17 AM EST

The stock of the investment management firm looks as though it could be in for more price weakness.

Bearish Bets: 3 Sagging Stocks You Should Think About Shorting This Week

Bob Lang
Jan 29, 2023 10:30 AM EST

These stocks are displaying bearish tendencies based on their technical patterns.

American Express Tells Tale of 2 Trends Ahead of Earnings

Bruce Kamich
Jan 26, 2023 9:24 AM EST

The credit card giant's charts present a mixed picture in advance of its fourth-quarter results on Friday.

Glimmers of Hope, Debt Limit Farce, Netflix Narrative, Strapped Consumers?

Stephen Guilfoyle
Jan 20, 2023 7:53 AM EST

Plus, a bird's-eye view of which direction the S&P 500 Index could take from here.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 12:27 PM EST REAL MONEY

    LIVE EVENT: Chris Versace and "Sarge" Guilfoyle Share Their Stock Market Insights

    This Monday, Jan. 30, at 12 p.m., our very own exp...
  • 11:48 AM EST REAL MONEY

    Watch Doug Kass on the Daily Rundown!

    In today's Action Alerts PLUS Daily Rundown, Doug ...
  • 11:03 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend On Real Money

    It's time to start using this power to build great...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login