2014-02-27

Yuan Insanity

The Chinese yuan has depreciated about 1.3% in the past month. Overall, it was a move from around 6.04 yuan per dollar to 6.11 yuan. It's a big move for the yuan because of the way the currency is managed, but it is not a big move in terms of currencies.

However, as with people believing home prices never go down, a lot of people believe the Chinese yuan never goes down. Oops.

Morgan Stanley Warns Of "Real Pain" If Chinese Currency Keeps Devaluing

The tipping point for spiraling losses is very close because many people are piled into contracts that assume low volatility in the yuan. Not only are they betting on appreciation, they are betting that the yuan doesn't move by much.

Thus if they yuan starts to depreciate, losses will pile up very quickly for investors and corporations. The market can slam into reverse very quickly and depreciation will be far larger than most people anticipate. Along with the rest of the Chinese financial system.

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