Last night’s blog contained some of the key sparks to watch this year, but I left some for today so as not to overwhelm. While we slept, the Chinese borrowed a page from the French National Bank. In an effort to curb the arbitrage of trading the YUAN in Hong Kong versus the mainland levels under the direct auspices of the PBOC, the Chinese Government raised overnight borrowing rates for those short the yuan in Hong Kong. The rate is only on overnight borrowings so it is intended to make being short against the PBOC cost prohibitive.
The French central bank would do this back in the early 1990s when speculators would try to pressure the French to devalue the franc against the D-Mark. Then-Bank of France President Jean-Claude Trichet called this his “fort franc” policy and would maintain that the French currency would remain as solid and firm as the German mark. When the franc was under attack, the Bank of France would elevate overnight rates to above 100% in order to punish the evil speculators. It didn’t matter what the short-term economic effects were or the costs, the French were going to remain tied to the D-Mark.
The Chinese will not be as forceful but a message will be sent that the YUAN is not a play toy for global investors. Will it have a market impact? It’s too early to tell but it will calm the Chinese currency markets. This will play out over many months but it is certainly a new variable to be aware of as the algos will be reacting through previous correlations that will become defunct once the new Chinese efforts are better understood.
***The Shameless Sycophant of the Ruling Classes Award: In the January 8 Financial Times, Martin Wolf, mouthpiece of the “Keep Britain in the EU” campaign, wrote an op-ed article titled, “A Vote For Brexit Is A Leap Into the Abyss.” Wolf rehashes the damage that could be done to the British economy if the Brits vote NO on the referendum to remain in the EU. But he raised an issue in his fourth point: “While the choice is strategic, the detailed ISSUES ARE TOO COMPLEX FOR THE PUBLIC TO JUDGE.” The issue for Wolf is that the voters are too stupid to understand the complexities of the EU that the ELITES have crafted, therefore democracy OUGHT not be allowed to function. This is the ultimate backstop for the entire European Union: No democracy because the voters cannot possibly comprehend how the man behind the curtain pulls the levers. Karl Marx had so poignantly referred to Thomas Malthus as a “shameless sycophant of the ruling classes” and it seems that it is an apt fit for the arrogant Martin Wolf. Long live the self-anointed philosopher king! What makes this thinking so dangerous is that it plays well to the anti-status quo political movements on the rise in Europe.
Also, the gambit played by David Cameron, the dumbest ruler of England since 1776, in calling the referendum is now at a loss on how to proceed. The present elite ruling England wants to be in the EU because it provides a larger stage on which to perform. The British have been searching for a larger role in the world after they were cast aside by President Eisenhower for the ill-designed Suez Canal debacle of 1956. It was right for Cameron to call a referendum so as to get the support of the British voters. The problem with the EU is that the elites don’t want the citizens to decide. Cameron called the referendum so as to undermine the Tory euroskeptics as well to prevent the rise of UKIP. Prime Minister Cameron is hoping to get Brussels to placate Cameron on certain key issues thus getting public support to remain in the EU. But if Merkel and Hollande are not in the appeasing mood at the EU meeting in February then the referendum will be delayed until 2017 or if the vote is held this summer then Cameron will lose.
The SPARK to ignite the fires will be that if Britain leaves the EU the German voters will push for a similar referendum. If Chancellor Merkel’s popularity continues to fall the German euroskeptics wills demand a greater say in the policies of Brussels. For the financial markets: What will the sovereign debt of Spain yield without the German checkbook? The Martin Wolf article reflects the thought of the European elites but when the public grows restive because of disillusionment with the Davos crowd politics will TRUMP economics. The British pound has been under pressure as markets are beginning to question the decision and governing abilities of David Cameron.
The POUND has been weak on the EUR/GBP cross as the markets have also come to accept what I wrote months ago: Regardless of what the FED does the Bank of England will be reticent to raise interest rates until the referendum attains greater clarity. Even if the Brits vote YES to the EU, the EUR/GBP cross will have to go higher because it is too low to satisfy British manufacturers. If Britain adopts the euro it will be with a much weaker POUND relative to its largest trading partner. But remember, if Cameron believes he was born to rule, it is a reflection that is intelligence has been harmed by aristocratic inbreeding. GOD save the Queen.