President Trump has been calling China a currency manipulator since before he became president.
Calling China out is one thing. But, officially designating China as a currency manipulator would be something else altogether. The “calling out” can be dismissed as political rhetoric, while the official designation – should it occur – would have serious consequences.
Today (Monday, October 15) the U.S. Treasury Department will release a report to Congress titled Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States. This is a semi-annual report, released each April and October, which details among other things how our major trading partners measure up against three criteria for designation as currency manipulators. China has never been so designated.
This past weekend, my email inbox has been flooded with text and videos from Jim Rickards, insisting that today’s report will in fact designate China as a currency manipulator. If it occurs, this action will automatically trigger a series of punitive measures by the U.S. against China, greatly escalating the so-called trade war Trump is accused of starting.
Soon after this (predicted) escalation by the U.S. – according to the Rickards scenario – China will retaliate with what Jim Rickards calls a sudden and deliberate shock devaluation of the yuan against the dollar, in order to crash the U.S. stock market.
Because of the enormous trade imbalance between the U.S. and China, there is no way for China to win a tit-for-tat tariff war with the U.S. China imports so little from the U.S., compared to our imports from China, that Trump can go on slapping tariffs on one Chinese product after another, long after the Chinese have run out of U.S. products to tax. An embarrassing situation for a country and a society that value “saving face” above almost everything else.
Doing serious damage to the U.S. stock market will be China’s way of “saving face”, by ostensibly “giving as good as they got” in this trade war.
Jim Rickards is selling an expensive investment signal service which utilizes stock option plays extensively, and all his email traffic into my inbox (and hundreds of others) this weekend has been designed to persuade me (and others) that his service is uniquely positioned to play the stock market crash he sees coming.
I’m not buying his service, but I’m intrigued by his trade-war/currency-war scenario.
Rickards has very little good to say about the forex market, and basically dismisses the idea of trading the dollar against the offshore yuan in our market. And maybe he’s right that the profit opportunities are much greater in playing the crash, and then the recovery, of the stock market. But, forex is the focus of my attention, these days. So, I’ll pass on the stock option gambit, and watch the USD/CNH for signs of opportunity.
Rickards is talking about numbers in excess of 5% for the devaluation of the yuan, pointing to a previous shock devaluation in August 2015, as a precedent. And he implies that this next devaluation will dwarf that previous one.
From the low (6.2094) on August 10, 2015, to the high (6.5937) on August 11, the USD/CNH gained 6.2%. Let’s (conservatively) call it a 5% gain.
You can do the numbers in your head. A micro-lot of USD/CNH, worth $1,000 will gain $50 in profit, if the pair advances by 5%. A mini-lot, worth $10,000, will gain $500. And a standard lot, worth $100,000, will gain $5,000.
Looking at it from the perspective of pip-gain, a 5% move up in USD/CNH from a current price of 6.9150 would take the pair to 7.2600. That’s a 3,450 pip advance. At $1.45 per pip per standard lot, we once again have calculated a $5,000 profit (per standard lot).
If Rickards is right, and the shock devaluation launched in retaliation for today’s Treasury report is significantly larger than the August 2015 event, then the possible gain in this hypothetical LONG USD/CNH trade could be significantly greater than calculated above.
Margin, at 5% (corresponding to 20:1 allowable leverage), would also be $5,000 on a standard lot in this trade.
In their Forex Calendar, Forex Factory lists today’s Treasury Department report as “medium impact”, and the time of release as “tentative”. The Babypips Calendar does not list the report. Rickards says the report will hit the market at 4 pm, New York time. And, if his scenario is correct regarding the “currency manipulator” designation, the report will be anything but “medium impact”.
Jim Rickards isn’t shy about tooting his own horn. He proudly points out that this prediction is the result of his extraordinary skills as an analyst. And, as he says, “nobody else sees this coming”.
'Twill be interesting to watch.
If you decide to trade any of this, do so on the basis of your own analysis and your own due diligence. None of what I’ve just written should be taken as a recommendation.
As for Jim Rickards, he says the forex market is too risky to mess with 