Today’s precious metal dive due to the tiny Chinese rate hike confirmed that the biggest risk for precious metal bulls is a move on the part of China to take world governments off the competitive devaluation treadmill.
But of course, this was a nothing, piddly move — not even a yuan hike.
But it might be the start of something.
Here’s RBC via FT Alphaville:
Our current forecast envisions an additional 50bp of rate hikes in 2011 with risks biased to a more aggressive tightening cycle. The initial knee-jerk reaction to the China 25bp rate hike has been to sell risk – stronger USD, weaker commodity prices, lower equities, weaker EMFX, etc. The rationale behind this is that very easy Chinese monetary conditions have been one of the primary drivers for global asset demand (including commodities) and that this start to the rate hiking cycle will tighten monetary conditions thus reducing demand from China at the margin. We expect this kickoff to the rate hike cycle will be accompanied by ongoing gains in CNY with USD/CNY drifting lower to 6.60 by year-end and to 6.20 by Dec-2011.
That’s not much, but it’s about establishing a trend towards more tightening (and thus easing pressure on the rest of the world).