June 3, 2016

Goldman Unveils The FX Doom Loop: Turns "Outright Negative" On Yuan Due To "Weak Link"

Today, Goldman has released a note which lays out precisely this relationship in what it calls the "RMB-FOMC Monetary Policy Loop", but before we introduce yet another firm's realization of just how circular the relationship between central banks and markets has become, here is Goldman's abrupt reversal on what it think will happen to the Yuan in the near-future, because as Goldman's Robin Brooks - who has been relentless bullish on the USD - now says that "we shift to an outright negative view on the RMB, in line with this week's Asia Views and our bearish RMB forecast."

The reason for Goldman's sudden bearishness is "because there is a weak link in China’s management of its currency."

This is how it explains the link:

"To be sure, the government has clearly communicated a shift in focus to a trade-weighted currency basket, de-emphasizing the signal that the bilateral exchange rate versus the Dollar carries. But domestically, the only signal that matters is $/CNY, so that higher fixings could easily re-ignite capital flight, as households and firms anticipate a faster pace of depreciation."

 One need look no further than the recent spike in bitcoin driven by Chinese buying to see this in action, as the local have been scared out of their wits by relentless PBOC intervention in the FX market. Goldman goes on:

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