Monster Silver Price Rally Brewing

By: Clive_Maund

On silver's 1-year chart we can see that a fine large Double Bottom is completing. We already had the breakout on good volume from the 2nd trough of this Double Bottom in the middle of February, and it was this event that has (rightly) caused traders to pile into silver, although the price hasn't moved much - yet. The better silver stocks, on the other hand, are already on fire, because the "writing is on the wall". Right now the price is consolidating following the breakout in a fine tight Flag formation, from which upside breakout looks imminent.

Silver $21.46

How far is next major uptrend in silver likely to carry? - to figure that out we turn now to the long-term 14-year chart, which shows silver's entire bullmarket to date. On this chart we see that, despite the severity of the reaction of the past 3 years, silver never broke down from its long-term uptrend, which now looks set to reassert itself with a vengeance after a fine base pattern has formed at a classic juncture, in a zone of strong support just above the support line of the long-term uptrend. Volume indicators are positive, relative to price, and everything is in place for a monster uptrend to begin, with the giant blue arrow drawn on the chart designed to assist those of you with limited powers of imagination in grasping its potential magnitude - little wonder then that silver ETFs and stocks are such compelling investments here - their performance soon could put many tech stocks in the shade.

Speculating about the possible reasons for such a big uptrend is a complete waste of time - maybe John Kerry will succeed in starting WW3, who knows?

See the original article >>

Volatile markets prove difficult to trade: Commodity roundup

By John L. Caiazzo

The failure of the West to address the current aggressive action by Russia pertaining to their incursion into the Ukraine remains of concern becuase the Eurozone relies heavily on the delivery of natural gas through the Ukraine pipelines. Any disruption by Russia in response to threats of sanctions could prove disastrous.

The current standoff could be a determining factor in the coming week’s market action. The markets have become a “trading affair.” There is not much question in my mind that technicians are getting whipsawed in their trading, probably continually adjusting their parameters and their buy or sell stops. An an ever-widening spread develops when markets undergo inordinate price swings, and it becomes financial suicide to adjust stop protection. My basic philosophy has always been to “plan the trade and trade the plan.”

I also discuss a strategy with my clients that includes a risk/reward ratio determined by the recent market performance. Another consideration is the possible proliferation of technicians’ buy or sell stops that could exacerbate a move in a particular direction. What also must be considered is the perception by investors who purchase trading programs that they are alone at the particular buy or sell stop points near support or resistance levels. That kind of false sense of protection provides contrarian traders with a trading bonus as markets will eventually find their true intrinsic price levels based on, yes you are correct, supply/demand fundamentals. That’s why I believe that training and trading with an amateur can only assure you of becoming one.

Now for some facts with my usual interpretation.

Interest Rates: June Treasury bonds closed Friday at 133 15/32nds up 5/32nds but down from its intraday high of 134. Concern over the Ukraine situation provided for the move to the “safe haven” of the U.S. Treasury market. For the week yields on the 10 year Treasury note declined by 14 basis points. The upcoming vote could see Crimea moved to Russian control as most of the people consider themselves Russian. We will have to wait and see and then try to determine what if anything the West will do regarding sanctions. For now we see bonds trading within the range we had earlier suggested with prices near the higher end of that range. We are also waiting for next weeks Federal Reserve meeting, the first for the new Chair, Janet Yellen.

Stock Indices: The Dow Jones Industrial average closed at 16,065.67, down 43.22 points and for the week has lost 2.4%. The S&P 500 closed at 1,841.13, down 5.21 points or 0.3% and for the week lost 2%. The tech heavy Nasdaq closed at 4,245.40, down 15.02 points or 0.4% and for the week lost 2.1%. The uncertainty over the ramifications of the Crimea situation remains a concern since it could produce a disruption in the Eurozone energy supply. We continue to feel the U.S. equity market is due for a major correction and once again strongly urge holders of large equity positions to implement risk hedging strategies.

Currencies: The U.S. dollar index closed at 79.55 on Friday, down 20.5 points and for the week lost 1.8%. The decline in yields on U.S. treasuries detracts from dollar investment On Friday U.S. data indicated a decline in March of consumer sentiment to its lowest level in four months. Wholesale prices in February declines as well for the first time in three months. We could see continued pressure on the U.S. dollar based on our expectation of a continued economic contraction. We had been bullish on the dollar and have now moved to neutral. In other currency action the June Euro gained 48 points to close at $1.3906, the Swiss Franc gained 37 ticks to close at $1.1470, the Japanese yen gained 33 points to 0.09876, the British Pound 21 points to $1.6625, and the Australian dollar 5 ticks to 89.69c. The Canadian Dollar lost 25 points to close at 89.92c. We prefer the sidelines.

Energies: April crude oil closed at $98.89 per barrel, up 69c but for the week lost 4% mostly tied to concern over the Crimean situation which could threaten crude supplies from Russia. While there has been some talk about the U.S. ability to make up any shortfall from Russia should they decide to cut off supplies in the face of threatened sanctions, we doubt the U.S. can fully make up that shortfall. We are on the sidelines for now until some determination is made on the Crimea and Russian actions.

Precious Metals: April gold closed at $1,379 per ounce on Friday, up $6.60 or 0.5% against the weak dollar in which it is denominated. For the week gold gained around 3%. Gold, as is the case with U.S. Treasuries, sometimes acts as a “safe haven” hedge when equities decline. We continue to prefer the sidelines in gold but once again, for those that must have a precious metal in their portfolio, we prefer silver. May silver closed at $21.41 per ounce, up 22c or 1% also against the weak dollar. The current Ukraine situation is dominating the market place globally and we prefer the sidelines until the “smoke clears”. April platinum closed at $1,469.60 per ounce, down $9.80 and for the week lost 0.9%. June palladium lost $5.70 or 0.7% to close at $773.25 per ounce and for the week lost 1.1%. We prefer the sidelines but once again our preference would be palladium over platinum.

Copper: May copper closed at $2.95 per pound, up 3c on shortcovering after the recent heavy long liquidation over concerns of a slowdown in China. Copper lost 4.2% for the week and for the year so far has declined by nearly 13%. We have favored the short side of copper for some time and would take profits here.

Grains and Oilseeds: May corn closed at $4.84 ¾ per bushel, down 1/4c on profittaking after recent strength tied to the Monday USDA bullish report on reduced carryout. We prefer the sidelines in corn after having been supportive. May wheat closed at $6.86 ¾ per bushel, up 12 3/4c on continued concerns over weather damage and acreage switches to soybeans. We prefer the sidelines after the recent strength took prices from the $5.50 level. May soybeans closed at $13.90 per bushel, down 6 1/4c on continued weakness over sowings gains. We still like the long
Coffee, Cocoa and Sugar: May coffee closed at $1.98 per pound, down 7.95c on profittaking after recent strength tied to the Brazilian drought. During the session coffee traded as high as $2.05.05. We are now on the sidelines in coffee. May cocoa closed at $2,987 per tonne, down $19 also on profittaking after recent strength. Stay out for now. May sugar closed at 17.28c per pound, down 54 points on continued profittaking after possible overbought condition from the 15c level. Brazilian weather continues to play a roll in softs and for that reason we remain on the sidelines.

See the original article >>

Perfect storm: Cycles, fundamentals converge during critical week

By Jeff Greenblatt

As the Ukraine/Crimea crisis escalates, we’ve heard the West is supposed to announce the “cost” to Russia for this incursion into the Crimea on Monday. Although I always anticipate an important news event to materialize on one of our time windows, it never dawned on me we’d get such an important geopolitical event. This one is big, and the takeaway to the whole thing might be a return of the Cold War.

I doubt very seriously the West is going to risk a major war here. It appears the Russians have factored in Western Retaliation. Last week, a huge withdrawal was made out of a central bank to the tune of $106.1 billion, and the speculation according to a CNBC report is that it is Russia. The Russians might be pulling funding off shore over concerns of retaliation for the referendum in the Crimea. It wouldn’t be the first time since the Russian based Narodny Bank pulled a huge amount of dollars out of the United States and into their London branch back in 1956 when the Soviets invaded Hungary.

I don’t think the market is going to like this. I’ve shown you this chart before but it’s worth looking at again.

This is characteristic of what happens to financial markets during major geopolitical events. This one was arguably the worst one in the entire 20th century, the invasion and surrender of France to the Nazis in 1940. Our takeaway is similar to what happened in 2011. Markets peaked at the start of the crisis, similar to the Arab Spring, and don’t usually bottom until the outcome becomes a foregone conclusion. Since the Russian Duma doesn’t actually vote on annexing the Crimea at least until the end of the week, there’s a chance this could be an old-fashioned major shake of the trees.

Markets have peaked in this window, but even as the VIX has turned up, the usual fear and trepidation is missing. Too many people still view the market as business as usual. Even Warren Buffet announced he was a buyer. Don’t be fooled by Mr. Buffet, none of us have that kind of staying power. Remember he bought halfway through the financial crisis in 2008 and lived to tell about it. This guy probably has more money than a major U.S. city. He’s probably the only one in the entire country who can afford to dollar cost average. For the rest of us, we need to wait until the fear level gets so thick, the headlines come bursting through the television.

Here’s the VIX coming into the new week, and it’s as high as it's been recently. Without fear, the potential is for it to get a lot higher. I’ve been banging the table for well over a year that we need to see a reading near 30 to get a real sustainable move. At least I’m in good company. This week it was none other than Marc Faber who said equities are vulnerable to a 30%-40% hit, simply because we haven’t had a real correction since 2011. He’s right, of course, but most people you listen to in the media won’t tell you that. It's human nature to project the next 12 months based on the prior 12.

Remember, it was a handful of weeks back when I brought the powerful looking green move in the SOX to your attention? I told you at the time I was going against my own methodology of believing strength would hold and believing for the potential that whoever it was that bought in February could end up being part of a huge bull trap? The SOX isn’t there yet, that kind of trap takes time to develop, but here is at least one semi stock that is headed in that direction.

Wisdom is knowing when to follow the rules and when to seriously consider the exception to the rule. This is one of those times, as we are not in a normal market. Don’t let anyone fool you; we’ve been working these market cycle points for the past 15 years, and if you forget everything else I tell you, remember that when cycles complete, they end hard.

You won’t find many bullish sequences like the one we just had. If I had my druthers, we’d have peaked in January and stayed down until now. It would have set up a tremendous buying opportunity. As it stands, for that tremendous buying opportunity to still materialize by the beginning of next week (the end of our time window season), this will have to be a monumental bear week. Fear will have to build as the market drops, if it indeed does drop. This is not a prediction, but for the market to give us the proper buying opportunity, it needs to make up for lost time in February. For the life of me, I can’t understand who was actually buying in the past month. Who buys with big money when the VIX is so low? I will tell you who. It’s those who didn’t buy when they should have and are now chasing performance. That’s why stocks like Altera are developing bull traps. While most semi stocks don’t look that bad yet, if you go around the horn of the entire market you’ll find plenty that are in an advanced state and others in trouble of severe technical damage. Have you seen the HGX lately?

Here’s a chart that has already reached the lower rising channel line and a rupture here could have serious implications. If I’m showing you a lot of charts today for this update, it’s because we have reached the most important stock market week of the entire year. We are coming to 618 days off the October 2011 low at the same time we are hitting the seasonal change point and the Gann Master Timing Date—all by the end of the week. I doubt we have enough time to sell enough to truly hit a bottom by Friday, so I’m starting to think of this market the way I did in 2011 with a first low possible by the seasonal change point.

However, we remember how 2011 turned out. There was a relief rally into May when the perfect storm hit and the oil market collapsed. Depending on how high the VIX can get this week, there’s a chance we could see the end of phase one of this selling by the end of the week. I don’t think 2014 is going to be anywhere close to the performance we had last year.

Part of the reason is the geopolitical situation. I know I’m one of the few stock market guys who is paying seriously close attention to all of the events in the Middle East. This is 2014, and if history is any guide, we are far enough along in the recovery from the financial crisis to be concerned about the geopolitical situation. For those of you who don’t know, the San Francisco earthquake of 1906 precipitated the panic of 1907, and by 1914 (a mere seven years), the world was engaged in WWI. From the crash of 1929, the Japanese were very active early in the 1930s, and Hitler was on the move. On March 7, 1936, has he occupied the Rhineland not even seven years after the crash. We are five years from the bottom but 6.5 years off the 2007 high, so tempers are ripe for this kind of showdown.

I always thought the problem would develop between Israel and Iran.

Do you believe in prophecy? Over the weekend, I had a dream about the passing of Mark Haines. It was a disturbing dream, but I’ve discussed his call for the bottom in 2009 in this space countless times through the years. I believe this dream has something to do with the era of his market call being over. What that could mean is the five-year bull market spawned by his call could be over. I have no technical proof of this other than this massive time cycle that just expired, and only time will tell. All I can tell you is since our big time window hit at the end of February, we’ve seen the Russians move on the Ukraine and a massive jetliner disappear out of the sky.

It seems that what lays in front us is going to be a lot different than where we just came from. Be very careful this week.

See the original article >>

Finally, a Plausible Scenario of What Happened to Flight 370

by Charles Hugh Smith

The scenario that best fits the facts is a spontaneously initiated "drastic political protest" by the captain that went awry.

At long last, a plausible scenario of what happened to Flight 370 has emerged. By plausible I mean that the scenario fits all the known facts.
The key piece of evidence has finally been released by Malaysian authorities: Pilot Spoke to Air Controllers After Shutoff of Data System (NYT.com).
This proves that one of the pilots turned off the ACARS communications link and then reported to air traffic control (ATC) as if all was normal. Twelve minutes later, one of the pilots switched off the aircraft's transponder, which transmits the aircraft's altitude and location.
This sequence of events more or less proves that one of the pilots was in charge of the aircraft. Given the lack of evidence of duress, this sequence strongly suggests one of the pilots was executing a plan of his own rather than following orders of hijackers.
Given the strong political views of the captain and his mastery of the Boeing 777, all evidence points to the captain as the pilot who turned off the communication links and was in command of the aircraft thereafter.

Post-disappearance moves suggest sophisticated handling, experts say (CBSnews.com)
Malaysia Airlines Flight 370 search grows as pilots face increased scrutiny (CNN.com)
Though early reports on the captain were limited to neutral comments by peers that he was a nice guy and a devout family man, the strength of his opposition to the current regime in Malaysia is now coming to light:
'Democracy is dead': 'Fanatical' missing airliner pilot pictured wearing political slogan T-shirt (Daily Mail)

Captain Zaharie Ahmad Shah, a father-of-three, was said to be a 'fanatical' supporter of the country's opposition leader Anwar Ibrahim - jailed for homosexuality just hours before the jet disappeared.

It has also been revealed that the pilot's wife and three children moved out of the family home the day before the plane went missing.
Anwar Ibrahim is a broadly popular democracy icon and former deputy prime minister whose prosecution on a charge of sodomy is seen by many Malaysians as political persecution.

‘Colleagues made it clear to us that he was someone who held strong political beliefs and was strident in his support for Anwar Ibrahim,’ another investigation source said. ‘We were told by one colleague he was obsessed with politics.’

What makes this significant is the Malaysian authorities' attempts to suppress this possible motive.

Malaysian officials initially appeared keen not to direct any suspicion towards Zaharie or his co-pilot, 27-year-old Fariq Abdul Hamid, who was last week revealed to have invited two women passengers into the cockpit and smoked on an earlier flight to Phuket.

But evidence of the way the plane’s transponder and communication systems were disabled and the way the plane was expertly flown over the Indian Ocean apparently using navigational waypoints meant only a skilled aviator could have been at the controls. Investigators were also baffled by why, if hijackers took over the plane, there was no Mayday call or signal from the two pilots to say the cockpit had been breached.

Thus we have motive and clear evidence that it was the captain, not the co-pilot, who was in command of Flight 370. Enraged by the Soviet-style show-trial and imprisonment of his political hero, the captain may have "sabotaged the flight as a form of drastic political protest." Flight 370: Was Hijacking The Pilot’s Political Revenge?
Now add in that neither the co-pilot nor the captain requested each other, and it seems increasing likely that the captain was making it up as he went along, applying his deep knowledge of the aircraft and navigation to sketch out a makeshift initial plan that was dynamically modified along the way.

I think we can easily trace a plausible series of steps the captain initially took, and then speculate knowledgeably about the challenges and decision trees that arose later in the flight.

The first challenge would be to render the co-pilot unable to contest his control of the aircraft. The easiest way would have been to dissolve a sedative in a beverage and coax the co-pilot into drinking the Mickey Finn.
The "mumbling co-pilot" heard by the airline pilot flying to Japan who radioed Flight 370 offers tantalizing (if scant) evidence of this. (Interestingly, that pilot was confident he spoke with the co-pilot, not the captain.)
Alternatively, the co-pilot fought for control of the aircraft, one explanation of the abrupt climb to 45,000, well above the aircraft's designed ceiling.
If there was a struggle, clearly the co-pilot lost that battle or had already been incapacitated by other means.
Another explanation for the climb to 45,000 feet and the subsequent drop to 23,000 feet is that the captain sought to deprive the passengers of oxygen for long enough to render them unconscious but not long enough to kill them.
Given the profile of the captain that is emerging, I see little evidence of a personality who would set out to kill everyone on board, including himself. I believe the evidence strongly suggests a political motive, to embarrass the Malaysian government and perhaps to do so by seeking asylum in another country.
Once again, the key here is to understand the incomplete nature of the captain's plan: after the initial phase was successful--turning off the ACARS and transponder, incapacitating the co-pilot, and moving beyond the range of Malaysia's military radar-- a number of destinations might have occurred to the captain. It's important to note that flying was not just the captain's vocation, it was also his hobby. I think it is safe to say his life revolved around aviation and flying.

Data showing the number of plausible runways where the plane could have touched down - which need to be at least 5,000ft - offer a baffling number of potential locations.

According to a map drawn up by U.S. radio station WNYC, there are 634 locations which could fit, from Australia to the Maldives to Pakistan.
However, the true number is likely to be even higher, as estimates of how far the plane could have travelled have been increased since the calculations were carried out.

Here is the best current map of the possible routes of Flight 370. I have added the decision tree the captain faced: either fly north and seek political asylum or a remote landing site or fly south and search for a remote landing site.


If the co-pilot had regained control of the aircraft, either alone or with the aid of crew and passengers, he would have first turned on the ACARS and transponder and sent a Mayday signal. Since this didn't happen, we can be confident that the captain was in command of Flight 370 for the duration of the flight--roughly 7.5 hours.
While we don't know if the aircraft landed at some point, we do know the last ping to the satellite was at 8:11 a.m., roughly 6 hours after the last military radar contact.
Here are some other points to consider:

The fact that the Malaysian authorities withheld the sequence of events in the cockpit strongly suggest that they quickly identified the potential for a political motivation for the flight deviation and sought to suppress speculation along this line of inquiry.
This also explains why they withheld the military radar data for three days, and their continuing reluctance to share information or come clean about what they know. They fear the truth, and with good reason.
The captain's home flight simulator suggests that he may well have practiced all sorts of landing scenarios, just out of curiosity or to sharpen his skills in outlier situations. Think about it: if you already have over 18,000 hours in the cockpits of advanced aircraft, you're not going to practice conventional landings you could do in your sleep. That would be beyond boring to someone of his experience.
Given the few hours the captain had to assemble his plan, it is likely that once the initial phase was successful, he might have changed his mind, perhaps more than once.
Given his long experience in aviation, I think it very likely that he knew that the primary and military radars in the region were usually turned off at night. Off-the-record confirmations of this have come from Thailand and Indian officials with knowledge of radar covering the Andaman and Nicobar islands.
Thus it is not surprising there were no primary radar sightings in the region: most or perhaps all of the radars were turned off.
It's also worth noting that most of the primary radars in the region have limited ranges--100 miles or less appears to be average. It is more than possible to thread a flight through the gaps in coverage, even if the radars were active.
Let's assume my speculation is accurate and the captain had no intention of crashing the 777 and killing all on board. As I noted in my first entry on Flight 370, if that was his intention (or simply suicide), why fly for hours? Despite his best intentions, he may have encountered some problem that he responded to incorrectly; it's even possible that he missed his intended destination or became confused about his location.
What Happened to Flight 370? An Analysis of What Is Known (March 13, 2014)
The scenario that best fits the facts is a spontaneously initiated "drastic political protest" by the captain that went awry, despite his intentions and experience.

One last thought: since the U.S. must monitor potential airborne threats and nuclear explosions virtually everywhere on the planet (with the exception of Antarctica), why wouldn't the U.S. have wide-aperture thermal imaging assets in space? And if the U.S. has space-based thermal imaging assets, would they be so low quality that the heat signature from two large jet engines would not show up? That seems unlikely.
Since it has long been known that the U.S. has "wired the oceans for sound," (SUBMARINES, SECRETS, AND SPIES - NOVA/PBS) it's also likely that the sound of a large aircraft hitting the water would also have been detected, regardless of the remoteness of the location.
All of which is to say that it seems probable that the global and space-based intelligence gathering assets of the U.S. recorded some sort of signals that could provide clues to the final resting spot of Flight 370.

See the original article >>

Three Breakouts in Gold and Silver Stocks

By: Rambus_Chartology

I’ve shown you several comparison charts with the HUI, GLD and SLV that shows they all tend to breakout at roughly the same time. One can sometimes be stronger than the others but they tend to breakout at the same time. This week was no exception. All three broke out of their consolidation patterns this week. Who would have thunk it.

First, lets look at SLV that shows the bull flag we’ve been following since SLV broke out from the 5 point rectangle reversal pattern. Yesterday the price action hit the top blue rail and fell back, just as you would expect on the inital hit. The question was how many bears were on the other side of that top blue rail? Today answered that question without a doubt. The big gap up this morning told us the bears were gone and they are now in retreat looking for new high ground they will try to defend. Below is a 2 hour 4 month chart for SLV that shows the breakout today and the backtest.

Below is a 2 hour 4 month chart for GLD that looks totally different than the SLV chart. They are different but similar if you look at the base or reversal patterns and the consolidation patterns. Here you can see GLD formed an inverse H&S bottom as its reversal pattern. As we all know gold has been stronger than silver so we should look for a strong consolidation pattern. The strongest consolidation pattern that I know of, and nobody recognizes them, is a consolidation pattern that points in the same direction as the trend. As you can see on the SLV chart above the bull flag slopes down against the uptrend. This is what a normal consolidation pattern looks like. When a stock is in a very strong trend it will slope with the trend instead of against it.

Today GLD gapped above the top rail of it bullish rising flag consolidation pattern and did its backtest just as SLV did.

Below is a 2 hour 5 month chart for the HUI. The last time I showed you this chart we were looking for the 6th reversal point as shown by the 6 with a question mark. As you can see the HUI rallied back up to the top blue rail and declined back down about half the length of the rectangle where it found support. That’s all the strength the bears had left so the bulls wasted little time in taking control of the situation. The bears are exhausted and need a new area to defend. The bulls gapped out of the rectangle and are now above horizontal resistance. Folks, from a Chartology perspective, it just doesn’t get any prettier. At some point we’re going to see a consolidation pattern form that will be much bigger than these little ones that have built out so far.

If you recall I mentioned how we were reversing symmetry backup vs how we came down. With more time on this chart now you can begin to see the reverse symmetry taking hold as this rally progresses. I’ve labeled all the reversal points so you can see the battle that goes on between the bulls and the bears. Each reversal point is a skirmish and when the consolidation pattern finally breaks, to the victor goes the spoils. You can see the bears were in control on the way down but since the blue 5 point bullish falling wedge reversal pattern broke to the upside the bulls are now in control.

Weekly comparison chart.

In my humble opinion you can spend every waking minute trying to figure out why is gold and and PM stocks going up. Is it because of inflation, deflation, copper, the stock markets, currencies , War or a hundred different reason’s? If you just follow the price action and devote the time spent trying to find a reason for why, you will be way ahead of the game. You don’t have to know the answer to the question everybody is trying to answer. It’s irrelevant. The answer is right there in front of you if you take the time to understand what the chart is telling you.

See the original article >>

Yuan Implied Volatility Spikes To 2-Year High As PBOC Widens Trading Bans

by Tyler Durden

While Goldman is quickly down-playing the decision by the PBOC to double the size of the daily trading bands for USDCNY to +/2.0% as a risk-off event (just as it was in 2012 - but blame that on Greece as cause rather than symptom), BofA is a little less sanguine about the move noting a more volatile CNY/USD without trend appreciation will deter hot money inflow and perhaps will result in some unwinding of previous inflow. With 1-month volatility spiking to over 4% (its highest in over 2 years), the move is sure to remove some carry traders as risk-rewards break down on their leveraged positions.

Implied volatility is dramatically higher (i.e. the market is pricing in expectations of more volatility going forward) which reduces the risk-reward characteristics of the carry trade and thus removes many players (or at best merely reduces their leverage)...

Via BofAML,

The PBoC widens CNY/USD daily trading band to +/-2.0%

The PBoC on 15 March announced to widen the yuan-dollar (CNY/USD) daily trading band to +/-2.0% from +/-1.0%, effective from 17 March. The previous band widened took effect on 16 April 2012 when the band was widened from +/-0.5% to +/-1.0%.

This should not be a big surprise to the markets as the PBoC has made it clear recently that it would widen the band this year. Perhaps the timing of this band widening is slightly ahead of what markets had expected.

What's the most important message? 

The band widening strengthens the PBoC's signal that the one-way bet on CNY gain is over, and we should expect more CNY/USD volatility going forward. In the PBOC's own words, two-way yuan fluctuation will become the norm. In the past month we have observed falling interbank rates and falling CNY/USD in China. We believe these moves were engineered and coordinated by the PBoC to solve the dilemma (rising rates, rising hot money inflow and rising CNY) it was facing in 2013. 

Where can the CNY/USD exchange rate go? 

Chinese policymakers and academia have reached the consensus that the current USD/CNY (spot rate was 6.15 as of 14 March) is very close to its equilibrium level, so perhaps we will see neither trend appreciation nor trend depreciation in the near term. In the medium to long term, the equilibrium value of CNY/USD will be determined by a number of factors including money supply and inflation in China and the US.

What's next step regarding China's FX regime reform? 

We believe the PBoC won't stop here, but further band widening is of little meaning. A much more important and meaningful reform is to change the mechanism on setting the daily fixing of CNY/USD. In our view, China will eventually shift to a market-based FX regime. As an intermediate step, China could peg yuan to a basket of currencies weighted by the importance of its trading partners. More specifically, the Singapore's BBC (Basket, Band and Crawl) regime seems to be favored. A reform towards a real managed float such as the "BBC" system requires a group of more confident and pragmatic political leaders who are true believers of markets. We think the time is ripe as the current leaders, who consolidated their power base at a much faster pace than expected in 2013, are market oriented.

What's the impact on capital flow and growth? What's the impact on money flow and the economy? 

In our view, a more volatile CNY/USD without trend appreciation will deter hot money inflow and perhaps will result in some unwinding of previous inflow. However, it should not be a big worry as China's has a massive US$4.0tn FX reserves, 20% reserve requirement ratio (RRR) and only 67% loan-to-deposit ratio. If capital outflow risks the stability of interbank liquidity and base money supply, the PBoC has a big room to inject liquidity by cutting RRR or purchasing government bonds. So the only thing we need here is a more flexible PBoC which closely monitors interbank liquidity and interbank rates. Chinese exporters will overall benefit from the band widening which sends strong signal of the end of one-way appreciation of CNY/USD. Note last year CNY appreciated around 6% against its basket, putting big pressure on Chinese exporters.

See the original article >>