Is The Chinese Renminbi (Yuan) /Dollar Peg In Jeopardy?

Bloomberg is reporting that Hong Kong currency traders are betting that the Renminbi/dollar peg will be reevaluted.

Currency traders are betting in the forward exchange rate market that the Hong Kong Monetary Authority will abandon its currency's 24-year peg to the U.S. dollar as overseas investment floods into the city.

In the forward currency market, an investor can buy Hong Kong dollars now for delivery in 12 months at HK$7.7106 per U.S. dollar, above the HK$7.75 top of the Hong Kong Monetary Authority's permitted trading range. The authority sold HK$7.828 billion ($1 billion) to defend the currency yesterday, twice as much as two previous interventions since Oct. 23.

It has become costlier to place bets on the peg ending. Volatility implied by U.S. dollar-Hong Kong dollar options expiring in six months rose to a 10-month high of 1.25 percent, according to prices from Tullett Prebon Plc. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of pricing options.

``What the forward market is telling you is that the pressure is not going to go away anytime soon,'' said Russell Jones, global head of foreign exchange and fixed-income research at RBC Capital markets in London, who believes the link will remain. ``The monetary authority is going to have to keep intervening to maintain the peg.''

I view this as a clear warning sign that the dam has signs of bursting in this market. The recent financial turmoil here in the U.S. is starting to create a high level of distrust between investors and dollar denominated assets. Especially within the investment banking sector. People from other countries are starting to ask how they can own dollar denominated assets when the underlying asset is declining and the currency is declining.

The US Dollar index is the calculated using the exchange rate against 6 other major currencies:

Weighting of each currency in the index:

Chart of the US Dollar Index:

(Click for a sharper image)

I would not be surprised to see the Renminbi added to the list on the USD index in the coming years.

Down Goes Citi!!! Down Goes Citi!!!

When a stock like Citigroup declines 20% in a month, I think that it is a call for serious concern. It has now become obvious that they have been hiding their losses. Today they announced a $6-$10 billion dollar write off.

Citigroup faces a write-down in the range of $6 billion to $10 billion, mainly because of exposure to subprime mortgages and collateralized debt obligations, CNBC has learned.

The size of Citi's write-off is still being debated, though a source told CNBC that Citi's board is pressing company finance executives to clarify the issue. The firm's audit committee is also scheduled to meet Sunday, in advance of the emergency board meeting.

Chart of Citigroup:

(Click for larger image)

Citigroup currently has a market cap of $182.69 billion. If they write down $8 billion dollars of losses (middle range of $6-10 billion). On Monday, 4.2% of the company will vanish into thin air.

Heisenberg and Einstein Take On Inflation

Have you ever tried reading a newspaper when it is pressed up against the tip of your nose? It is pretty much impossible to do without straining your eyes. That is how I view inflation, it is constantly in front of our face, and it is also constantly in motion. Also, prices tend to move so slowly that it is difficult to even see that they are moving at all. Whoever thought that Einstein's theory of relativity could be useful to economics?

It is kind of like seeing an old friend that you have not seen for a few years. Sometimes they will look drastically different, maybe they gained weight, grew a beard, or even had plastic surgery.

Imagine if you were able to transport yourself back 8 years and come back today. Would you perceive prices differently as they are now? Lets find out

Cost of gasoline in 1999: 1.33 per gallon (12 month average sampled 4 times per month)


2007: 2.95 per gallon

That is a 121% increase in the cost of gasoline over an 8 year period

Well, lets be honest. We all know that crude oil prices have skyrocketed because of increasing demand. I'm sure that prices for other things have not gone up. After all, the fed keeps telling us that inflation is under control.

Product	1999 Price	Price Today	% Increase
Electricity per 500 KWH	45.375	61.457	35.44
White Bread	0.899	1.212	34.81
Eggs Grade A	0.92	1.825	98.36
Orange juice	1.822	2.59	42.15

It is comforting to know that according to the federal reserve, people do not need to eat or use energy. Don't you feel better now that you moved that newspaper away from your nose :) ?