The recent surge in the US dollar has again
brought massive selling in the emerging market currencies, most notably
the Chinese yuan. This has occurred twice before in the past 15 months
and each prior instance has foreshadowed a 10% drop in the S&P 500.
Therefore, are we on the verge of another stock market correction?
We've been alluding to this in the podcasts of
late and I've been meaning to write about it with some illustrative
charts. However, the metals have been so volatile that I haven't had the
opportunity. Today, with both gold and silver mostly flat on the
session, I thought I'd seize the moment.
The problem for the Chinese is that the yuan is
pegged to the US dollar. So, when the dollar strengthens...as it has for
the past 60 days or so...the yuan strengthens, as well. The PBoC
doesn't like this very much as it makes their exports more "expensive".
It also creates a whole host of other issues, many of which are summed
up in this excellent article I found at ZH last evening:
So, anyway, it's the ripple effect of the
Chinese yuan devaluation that has my interest. First of all, here's a
chart USDCNY chart that covers the last five years. Just like when the
Japanese yen is portrayed by the USDJPY, a rising USDCNY means that the
yuan is getting
weaker versus the US dollar. Note that, even with the "peg" in place, the yuan has weakened by over 10% in the past three years.
Now let's drill in a little closer so that you
can see where we're headed with this. On this weekly chart of the
USDCNY, you can see four, specific periods of PBoC action to weaken the
yuan in response to a surging dollar.
- A 3% devaluation in week of August 9, 2015
- A 3% devaluation between late November 2015 and early January 2016
- A 2% devaluation in June of 2016
- This current 2.7% devaluation that began the week of October 9
OK, so this is where it gets interesting. Check this weekly chart of the S&P 500. Be sure to note:
- the 10% decline in mid-late August of 2015
- the 10% drop in early January of this year
- the 5% drop in June of this year
As you can see, there is a distinct, lagging
correlation between devaluations in the yuan and corrections in the
S&P. Perhaps, since the S&P was falling sharply before the US
election, this yuan-related correction has already occurred? Perhaps
the huge rally in stocks over the past five days will preclude any
further decline? Perhaps.
However, if history is any guide, a soaring US
dollar seems to put extreme stress on China and all emerging market
currencies. In the past, this has led to liquidity shortages which have
eventually bled into the US stock market. And the PBoC doesn't appear to
be finished with this latest round of yuan devaluation. Below are the
changes over just the past few days and check this new "warning" about
all of this from the BIS:
target="_blank" http://www.zerohedge.com/news/2016-11-15/v...r-indicator
Finally, as this site is dedicated to the
precious metals and gold is often well-bid as a "safe haven" during
periods of stock market selloffs, check this one last chart. Be sure to
note the timing of the surges in the paper derivative gold price and
note how they neatly coincide with the weakening yuan and falling equity
markets.
With stock market bullishness at extreme levels
and the gold permabears out in force, a sharp rally in gold from here
would certainly catch almost everyone by surprise. So, could a rally be
coming on the days ahead? Perhaps you should just keep your eyes focused
upon the yuan. It may once again be foreshadowing what is to come next.
Just something to consider.
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Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found target="_blank" at TFMetalsReport.com, an online community for precious metal investors.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
