There is some really strange price action in Chinese markets at the moment

Photo: Getty Images.

Commodities are getting crushed again in Shanghai today, with copper is down another 1.53%, aluminium down 1.68% and nickel falling 3.25% after resisting most of yesterday’s weakness.

The interesting thing about the price action in the Shanghai futures market is that it’s not being felt elsewhere, including forex markets and US exchanges. But there is one very interesting coincidence which suggests there is a change underway in the fabric of Chinese stock and currency markets at the moment.

As I highlighted in my AxiTrader Asian Market Wrap earlier, over the past few days the Chinese RMB rate has been weakening.

Here’s part of the AxiTrader report:

It’s been drifting higher and the fix, and price today of 6.3888, for USDCNY (onshore) was back to the levels we saw in August just after the dislocation that sent markets into a funk. I’ve been trying to figure out what the heck is going on and I think a tweet from noted Chinese watcher Patrick Chovanec this afternoon might have got to the nub of it.

Twitter – Screenshot

That’s important because the vice governor is talking about stability after inclusion in the IMF’s SDR basket, with the vote on November 30. So over the course of the rest of the week traders are likely to start to focus again on the USD/CNY fix, or rate, if it heads above 6.40.

Offshore traders of the RMB trade USD/CNH, not USD/CNY, and there is around a 4 big figure gap between the two today. So the 6.40 level is 6.4431 with the next important level of RMB weakness, one where the market would likely get real funky is 6.49 for the USD/CNH.

Here’s the daily USD/CNH chart:

USDCNH Daily (MT4, AxiTrader)

Certainly something to keep an eye on if these ructions in Chinese commodity futures and the weakening RMB continue.

More troubling however Bloomberg reports today that David Woo, Bank of America Merrill Lynch’s head of global rates and currencies research said that the marriage of convenience between the US dollar and the semi-pegged RMB is about to end in divorce.

“We forecast USD/CNY to rise to 7.0, which would represent 9% depreciation from the current level, compared with 3% depreciation implied by the forwards right now,” Woo said.

“We could see renewed decline of the RMB as early as the first quarter, as the combination of the inclusion of the RMB in the SDR and a December Fed hike (both of which are our central scenario) could turn out to be a perfect storm for the RMB.”

That could be troubling for more than just Chinese markets.

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