Morning from Greece!

The Chinese equity markets- and proxies in the metals space continue to thrive. Gold -and silver prices are rising again this morning on the back of 1) the Iranian helicopter crash in Azerbaijan raising stakes in the Middle East and 2) data suggesting that Chinese FX pressures were indeed VERY real in April.

One of my favorite academic economists, Brad Setser, estimates that around $50bns (including FX forward settlements) were used to combat the pace of the depreciation of the CNY through April. This is a testimony to the fact that the most expensive path includes a slow-burning depreciation. A one-off adjustment/devaluation to the new USD versus CNY real rates spread reality is probably a lot cheaper for China.

We hold the view that a devaluation could prove to be positive for Chinese equities looking for higher margins on export products as domestic retail markets are still weak, and the recent weeks of FX speculation in a devaluation have not exactly proven to be bad news for Hang Seng and the likes.

Chart 1: A $50bn defense of the CNY in April? (Source: Brad Setser)