Wednesday, May 24, 2017

Bitcoin and CNY

They are going out pretty far on the risk curve these days.  Bitcoin is around $2400, Ethereum, the new hot Bitcoin wannabe, is rising even faster.  Back in 2013, when Bitcoin was on the rise, the stock market was bullish and the bond market was bearish.    This time, it is a bit different.  While the stock market is bullish, the demand for bitcoins seems to be from those looking to convert from CNY to dollars, using bitcoin as an intermediary.

The Chinese demand is the big driver here.  It doesn't paint a pretty picture about the value of the yuan, and how artificially supported it is by the Chinese government.  That cannot last long term, and their capital controls are only a temporary stopgap measure, before finding the true value of CNY.  I view the true value of CNY to be about 50% less than current value of 7.  So CNY/USD ~ 14.

On the road to yuan devaluation, there should be a boom in Chinese exports as the cheaper currency should help make China more competitive again versus lower cost manufacturers.  It should be deflationary for manufactured goods, which will help consumers but hurt non Chinese producers.  This is something that should play out over the next 2 years.  The signs of Chinese weakness are already showing, as the PBOC has pumped in massive liquidity this year to keep Humpty Dumpty together ahead of the National Congress meeting in the fall.

As for the S&P, it is now day 5 of the rebound, and we are at 2400.  This looks to be close to the top, as the put/call ratios are now very low again and the drop last week almost completely forgotten.  I see good risk/reward for a short here, with a target for a move down to 2375.  Just looking for 25 SPX points, but that feels like a lot in these low volatility times.

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