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Investors

shaken

as

renminbi

’

s

reputation

‘

one- way

sours

Last week the renminbi did something it has not done for years

–

it shocked

the market.

During the final three trading

sessions

of the week, the Chinese currency

dropped as much as 1.3 per cent against the US dollar, marking its biggest

three-day fall since 2011. The renminbi is now 0.6 per cent weaker against the

dollar than it was at the start of the year.

While the percentage decline may appear small compared with some of the

recent double-digit swings in other emerging market currencies such as the

Argentine peso or Kazakh tenge, a move of such

magnitude

in the renminbi is

highly unusual.

It could also spell trouble for investors. After years of ultra-low

volatility

thanks

to the managed

peg

against the dollar, the renminbi has often been the

subject of large, highly-leveraged positions for investors viewing it as an

as

bet

’

effective one-way bet. ANZ

’

s Patrick Perret-Green said the sell-off had left

some

speculative

investors with a

“

very bloody nose

”

.

Mitul Kotecha, FX strategist at Cr

é

dit Agricole CIB, said that last week

’

s move

could be a signal of a shift in Chinese currency policy.

“

The market was extremely long, and we

’

ve seen a big shakeout of these

positions

”

, said Mr Kotecha.

“

They want to try and at least

provoke

more

risk and more uncertainty in taking this trade. They are going to keep

engineering volatility until that becomes the case.

”

The sharp move follows a period during which the

offshore

renminbi rate has

been trading at an increasing

premium

to the

onshore

rate. That split

–

a

permanent feature of the market

–

is something made possible by China

’

s

strict controls on its capital account.

Global investors usually take bets on the currency through its Hong Kong

iteration, known by the shorthand CNH. Within China, companies and

investors use the official onshore rate, or CNY.

Early last week, the CNH rate had reached its biggest spread over the CNY

rate since 2010, suggesting that international enthusiasm for the renminbi had

overtaken that from within China itself.

Currency analysts say this widening gap may have

prodded

the People

’

s

Bank of China into action. The central bank sets the daily fixing rate around

which the renminbi is permitted to fall or gain 1 per cent a day, and last week

it guided the onshore currency weaker through higher fixes.

Some believe that the move by the PBoC to damp appreciation expectations

is part of its wider, long-held aim of introducing more two-way volatility into

the market.

It could also be an attempt to bring the onshore and offshore rates together

before the central bank widens the daily trading band, something it has

promised to do soon. The band was last changed in April 2012, when it was

doubled from 0.5 per cent.

“

This is a

tactical

move by the central bank to introduce more volatility

before widening the trading band. They are creating conditions for that to

happen,

”

said Shuang Ding, China economist at Citi.

“

If the currency

continues to appreciate and there is very little volatility, it will only fuel

speculation of more appreciation.

”

Weaker economic data out of China may also have played its part in the

sell- off. Last week HSBC

’

s flash index of manufacturing activity fell to its

lowest level in seven months, a sign that the country

’

s export engine is yet to

fire up this year.

Sentiment

towards China has also been hit by growing

troubles in the country

’

s vast shadow banking sector.

Many analysts believe the longer-term story of renminbi appreciation remains

intact. HSBC still expects the renminbi to reach Rmb5.98 against the dollar by

the end of the year, equivalent to about a 2 per cent gain from Monday

’

s

spot rate.

And unlike in previous periods of renminbi weakness

–

such as in the

summer of 2012

–

this most recent

bout

has not been accompanied by large

capital outflows from the country.

If anything, the opposite is true

–

the most recent data show that money

continues to pour in, with China

’

s trade surplus growing by $$32bn in

January.

However, some believe that the apparent shot across the bow by the PBoC

means that the days of low volatility are finally coming to an end.

“

Based on how the [offshore renminbi] has been trading over the past

couple of days, it is clear to me that the Chinese currency is no longer a safe

haven,

”

Soci

t

é

G

é

n

é

rale

s Benoit Anne wrote in a report.

Two UK banks' diverging fortunes, the latest EU-Greece banking spat, and US

holding company requirements for foreign banks

Feb 24, 2014 - 3:43 pm

The banking team discusses the varying fortunes of HSBC and RBS, the latest spat

between the EU and Greece over the treatment of the Greek banking system, and Deutsche

Bank reveals some details about how it will cope with the new obligation for foreign banks

operating in the United States to have a US holding companies. Patrick Jenkins is joined by

Martin Arnold,banking editor; Sam Fleming, financial policy correspondent; Daniel Sch

?

fer,

investment banking correspondent, and Peter Spiegel, Brussels bureau chief.

Why the euro inflation number is worse than it looks

February 24, 2014 5:33 pm

by Claire Jones

in< /p>

Share

0

January

’

s eurozone inflation number, out earlier on Monday, showed price pressures in the

currency bloc are not quite as subdued as first feared, registering 0.8 per cent

—

a touch

higher than Eurostat

’

s initial estimate of 0.7 per cent.

It

’

s hardly a game changer: inflation is still less than half the 2 per cent target. But the

slightly better figure will reduce pressure on the European Central Bank a little after it faced

renewed calls to ease policy following the release of the flash estimate.

However, the detail of this morning

’

s release suggest disinflationary pressures might be

even worse than feared. This excellent chart from Marchel Alexandrovich of Jeffries

International shows why:

One of Mario Draghi

’

s five reasons for why the eurozone is not about to enter a

Japan-style lost decade, where businesses and households rein in spending because of

suspicions prices will tumble, is that falling prices in the currency bloc are far less broad

based that in Asia

’

s second-largest economy.

Here

’

s what he

had to say earlier this month

:

Mario Draghi:

The inflationary expectations continue to remain firmly anchored and we do

not see much of a similarity with the situation in Japan in the 1990s and early 2000s. If we

look at the definition of deflation, that is a broad-based fall in prices, self-feeding onto itself

and happening in a variety of countries. We do not see that. Just to give you another piece

of information:

during the period of deflation in Japan, over 60% of all commodities

experienced a decline in prices; the percentages for the euro area average are much

lower.

On this score, the breakdown on the components of the inflation basket contained in

Eurostat

’

s release this morning is worrying. Mr Alexandrovich

’

s chart shows that deflation

is becoming more broad based across the bloc, and in all but one of the eurozone

’

s largest

economies.

That doesn

’

t mean that the eurozone is turning Japanese just yet

—

deflation remains far

less broad based than it was there. But it does not bode well.

South Sudan

’

s

factions vie for

control of oilfields

?

AFP

Soldiers stand near an oil refinery in Melut, Upper Nile state, South Sudan

Warring factions in

South Sudan

are battling for control of the country

’

s

dwindling oil production in a sign both sides have given up

on faltering peace

talks

and are instead seeking a military and economic stranglehold over the

cash-strapped country.

Oil companies have evacuated non- essential staff from fields in Upper Nile

state following renewed heavy fighting in Malakal, the regional capital, over

the past week.

Malakal lies about 150km south of the fields in Upper Nile state that pump the

bulk of the country

’

s crude. Oil production was hit earlier in the crisis when

the rebels in late December took control of Unity state, the other oil-rich

region.

Oil executives worry the forces loyal to

Riek Machar,

the rebel leader, will move

beyond Malakal, trying to encircle the fields to gain leverage. They said

however that a direct attack against the fields was unlikely.

An aide to Mr Machar said the fighting was heading towards the oilfields of

Adar and Paloich, in Upper Nile state.

“

There can be no work because of the

fighting. That will stop the oil,

”

the aide said. The Financial Times could not

independently verify the claim about the rebel movements north of Malakal.

Colonel Philip Aguer, spokesman for South Sudan

’

s army, insisted the fields

were so far safe in spite of rebel threats to

“

either divert or close down the oil

industry

”

. His government last week intervened to overturn a local state

directive to shut down the fields.

But an industry executive familiar with the situation described a more worrying

scenario, with oil groups operating the fields in Upper Nile, including China

National Petroleum Company and Malaysia

’

s Petronas, evacuating some

staff from Paloich.

“

They are lifting as many non-essential workers as they

can,

”

the executive said.

Industry officials say oil output has fallen to about 150,000 barrels per day,

down 40 per cent from before the start of the

conflict

, which has killed

thousands and displaced 900,000 people.

The output drop

–

and worries of further shutdowns

–

is forcing regular

buyers of South Sudanese oil such as China to seek alternatives, triggering a

rush for crudes of similar quality in Angola, Chad and as far away as Argentina.

The crisis is also contributing to higher global oil prices of around $$110 a

barrel.

Regional and international mediators rushed to negotiate a ceasefire after the

world

’

s newest country split in two in mid-December following a high-level

political fallout out between President Salva Kiir and Mr Machar, his sacked

vice-president. But the shaky January deal quickly fell apart as fighting flared.

Each of the two political leaders accuses the other of plotting an undemocratic

takeover of the country, which in 2011 seceded from Sudan

’

s Khartoum

government after decades of war.

The fighting in Upper Nile is so far the biggest violation of the ceasefire. Over

the weekend, witnesses reported dead bodies on the empty streets of Malakal,

with opposition forces in charge. The UN said some of the 20,000 civilians

sheltering at its base in the town fought each other along ethnic lines, leaving

at least 10 dead and sending 2,000 fleeing.

Mr Machar had originally suggested oilfields under his control could continue

to pump and divert revenues into an escrow account, but since then he has

appeared keener on halting oil production altogether. Without oil revenues,

which make up 98 per cent of South Sudan

’

s income, Mr Kiir will find it

difficult to maintain his government.

“

Riek will cut off the oil production and squeeze Salva

’

s cash,

”

says a

foreign observer in regular contact with Mr Machar. The observer added that

the stalled peace talks in Addis Ababa, the Ethiopian capital, were

“

just

theatre

”

.

But stopping production also risks eliciting a response from neighbouring

Uganda and Sudan, both of whom are officially allied to Mr Kiir. Sudan

’

s