Yuan weakness is metals’ strength: Bloomberg Gadfly

Yuan weakness is metals’ strength: Bloomberg Gadfly

By: 
Christopher Langner and David Fickling
17/11/16, 07:29 am

SINGAPORE (Nov 17): Most commodities are denominated in, and therefore pegged to, the US dollar but these days the Chinese yuan is starting to have as much influence on prices.

While there were fundamental triggers behind the recent spike and drop in raw materials, it's becoming clear that Chinese trading was among the main drivers. Investors in the northeastern city of Dalian have been piling back into commodities in a replay of what happened earlier this year. That's partly because they're seeking to protect their global purchasing power as the Chinese currency loses value.

Chinese Weight

The yuan has accelerated its decline since breaching the key psychological level of 6.7 per dollar in October. On Wednesday, the currency dropped to a record low in offshore trading after the People's Bank of China set the fixing at the weakest since August 2008.

So how come Chinese-traded commodities have suddenly plunged, with iron ore in Dalian down 8.8% from Monday's close? That's where Chinese regulators come in. The chatter among traders is that in the past couple of weeks authorities decided to stiffen enforcement of rules unveiled earlier this year to quash speculation.

That may be forcing a quick unraveling of positions. Since the start of last week, aggregate open interest in iron ore futures in Dalian has slumped by 43%, even as global investors become more bullish amid promises of $1 trillion ($1.41 trillion) in infrastructure investments under the incoming administration of President-elect Donald Trump.

Heavy Enforcement

Open interest in commodities futures has dropped by more than a third since the US election even as the outlook for the asset class has improved.

It's unclear how long the Chinese clampdown will last or how much it will affect prices once the latest round is completed. Open interest is a notoriously unreliable guide to price movements.  While front-month Dalian iron ore contracts have ricocheted between 282.5 yuan ($58.8) per ton and 656.5 yuan per ton this year, the price was barely a dollar apart between May 3, when open interest was at rock bottom, and on Oct. 19, when it hit a peak.

Ultimately, the price of commodities is guided by fundamental factors rather than the reactions of traders. Dalian's metal investors weren't chasing a speculative bubble back when iron ore prices surged in March, but getting out in front of a real increase in demand: China's crude steel output last month grew at its fastest annual pace since 2014.

Still, when the yuan weakens, the interests of Chinese retail investors looking to protect wealth and industrial companies focused on exports become markedly aligned. That looks like good news for metal prices -- whatever China's regulators do to damp trading.

US sanctions on Huawei could backfire

SINGAPORE (May 27): It was only to have been expected. After nearly a year of pressure that failed to stop Huawei Technologies Co’s expansion -- especially in the rollout of the next generation 5G wireless network globally -- in its tracks, US President Donald Trump signed an executive order effectively barring American firms from doing business with the Chinese telecommunications equipment company. The inclusion of Huawei on the US Department of Commerce’s Bureau of Industry and Security’s (BIS) Entity List means that companies would need to apply for a waiver to supply goods with 25....
Read More >>

Annica chairman Ong quits just as $33 mil goes missing at his law firm JLC

SINGAPORE (May 27): Jeffrey Ong, managing partner of law firm JLC Advisors, may have given instructions to pay out a sum of $33.2 million held in escrow by his firm for a client, Allied Technologies. According to Allied’s statement filed with Singapore Exchange on May 23, the payment may have been “unauthorised”, citing a letter it received from JLC on May 22. Allied’s statement did not specify who the payment was made to. Ong also abruptly resigned as non-executive chairman of Annica Holdings on May 20. In a May 22 filing with SGX, Annica CEO Sandra Liz Hon Ai Ling said Ong resigne....
Read More >>

SGX RegCo sees targeted approach in enforcement, more powerful market discipline

SINGAPORE (May 27): Tan Boon Gin, CEO of stock exchange regulator Singapore Exchange Regulation, says the market can expect a stronger regulatory presence. “You will see a series of enforcement cases coming up quite soon,” he tells The Edge Singapore. Tan’s assertion comes amid significant changes in the market as sentiment remains lacklustre and investors’ expectations change. The local stock market has gone through significant upheaval, not least because of the penny stock crash in 2013 that wiped out some $8 billion in value from the market. The event dented investor sentiment, a....
Read More >>