Dear PGM Capital Blog readers,
In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of April 25, 2016:
- China’s central bank guided the yuan higher at the sharpest pace since 2005.
- Venezuela Economic situation worsening.
CHINA’S CENTRAL BANK GUIDED THE YUAN HIGHER:
China’s Central Bank, (The People’s Bank of China or PBoC) on Friday, April 29, set its currency 0.52% stronger against the U.S. dollar, in the yuan’s steepest one-day fixing increase since November, reflecting the broad weakness in the dollar after the U.S. Federal Reserve moved to a more dovish tone.
The People’s Bank of China fixed the yuan’s daily mid-point at CNY6.4628, reaching the currency’s strongest level against the U.S. dollar since December 16.
As can be seen from below 5-day chart, the yuan closed on Friday April 29 in New York at CNY 6.4737.
The cause of the jump in the yuan’s level may be driven by forces outside China. As can be seen from below chart, the dollar index, which measures the dollar against a basket of currencies, has fallen 1.7 percent in the week of April 25.
US Dollar Currency Index 5-day Chart
The sharp decline of the USD-Index last week is based in particular on the Japanese yen, which composes nearly 15 of Index, which has risen sharply against the greenback last week as can be seen from below chart.
The Euro, which makes up more than 20 percent of the basket, has also climbed this week, tacking on as much as 1.56 percent against the dollar.
VENEZUELA ECONOMIC SITUATION WORSENING:
Venezuela’s economic disintegration hit a sad new milestone on Tuesday April 26, when President Nicolás Maduro announced that government employees would work only on Mondays and Tuesdays for at least the next two weeks to save scarce electricity.
The government in Caracas has also started scheduling rolling, four-hour blackouts around the country.
Venezuela’s epic shortages are nothing new at this point. No diapers or car parts or aspirin, it’s all been well documented. But now the country is at risk of running out of money itself.
The story began last year when the government of President Nicolas Maduro tried to tamp down a growing currency shortfall. Multi-million-dollar orders were placed with a slew of currency makers ahead of December elections and holidays, when Venezuelans throng banks to cash their bonuses.
As can be seen from below chart, this money creation by the central bank of Venezuela, the amount of money in circulation in the country has tripled last year.
In a tale that highlights the chaos of unbridled inflation, Venezuela is scrambling to print new bills fast enough to keep up with the torrid pace of price increases.
Most of the cash, like nearly everything else in the oil-exporting country, is imported. And with hard currency reserves sinking to critically low levels, the central bank is doling out payments so slowly to foreign providers that they are foregoing further business.
PGM CAPITAL ANALYSIS AND COMMENTS:
China Strengthening its Yuan:
With Japan’s markets closed on Friday April 25, and unable for now to do more damage (or damage control), China stepped in with some modest turmoil of its own by strengthening the Yuan fix by the most since 2005, pressuring the USD weaker for the 5th day in a row.
Commodities, which are trading in US-Dollars, have to push higher on the back of this with Crude Oil above $46.50 but Gold and Silver have surged to fresh 15 month highs (over US$1292 and US$17.81 per troy ounce respectively) as can be seen from below 2-year charts.
Goldprice 2-year chart
Silverprice 2-year chart
The Venezuelan Crisis:
As can be seen from below chart, the money printing spree of the Venezuelan’s Central Bank has lead to an unprecedented hyperinflation of 275 percent in 2015 and is forecasted to reach 720 percent this year, as can be seen from below table.
This high rate of inflation in Venezuela is a consequence of the more than doubling the monetary liquidity in 2015, including bank deposit, this even if the country has has fewer dollars to support the new Bolivars, which has lead to a constant depreciation of the nation currency the VEF against the USD as can be seen from below chart.
The problem is that it is “very difficult money” for Venezuela which needs to pay in hard dollars to print its rapidly devaluing domestic currency. In fact, among the sources of funds to purchase its own money was the liquidation of its gold reserve.
All of this brings us to Wednesday April 27 news from Bloomberg in which De La Rue, the world’s largest currency maker said, that they have sent last month a letter to the central bank of Venezuela, complaining that it was owed $71 million and would inform its shareholders if the money were not forthcoming.
In other words, Venezuela is now so broke that it may not have enough money to pay for its money.
Until next week.
Yours sincerely,
Eric Panneflek