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Crypto collapse intensifies as stablecoin Tether slides below dollar peg

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© Reuters. FILE PHOTO: A representation of cryptocurrency Bitcoin is seen in this illustration taken August 6, 2021. REUTERS/Dado Ruvic

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By Elizabeth Howcroft, Samuel Indyk and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK (Reuters) – The meltdown in TerraUSD, one of the world’s largest stablecoins, rippled through cryptocurrency markets on Thursday, pushing another major stablecoin Tether below its dollar peg and sending bitcoin to 16-month lows.

Cryptocurrencies have been swept up in a sell-off in risk assets, which has picked up steam this week as data showed U.S. inflation running hot, deepening investor fears about the economic impact of aggressive central bank tightening.

The sell-off has taken the combined market value of all cryptocurrencies to $1.2 trillion, less than half of where it was last November, based on data from CoinMarketCap.

Bitcoin, the largest cryptocurrency by market cap, hit a low of $25,401.05 on Thursday, its lowest level since Dec. 28, 2020 It was last down 2.1% at $28,400.

In the past eight sessions, it has lost more than a quarter of its value, or around $10,700, and is down 37% so far this year, trading far below the peak of $69,000 it hit in November 2021.

Bitcoin’s correlation with the Nasdaq composite has been on the rise recently and is now up near its all time highest level, based on Refinitiv data. The Nasdaq composite has tumbled around 8% so far this month.

Ether, the world’s second-largest cryptocurrency, fell to its lowest since June 2021, sinking as low as $1,700.

Unlike previous financial market sell-offs, when cryptocurrencies have been largely untouched, the latest selling pressure in digital currencies has undermined the broader argument that they are dependable stores of value amid market volatility.

NOT-SO-STABLECOINS

Stablecoin TerraUSD has been hit by the turmoil and broke its peg to the U.S. dollar, which led to it falling as low as 31 cents on Wednesday. On Thursday it was trading around 38 cents.

“Unfortunately, the fallout from this situation goes beyond the material losses sustained by investors,” said Anto Paroian, chief operating officer at crypto asset hedge fund ARK36.

“The de-pegging will likely result in a substantial regulatory risk – if not for the whole crypto space, then certainly for the stablecoins market.”

Stablecoins are digital tokens pegged to the value of traditional assets, such as the U.S. dollar. But TerraUSD is an algorithmic, or “decentralised”, stablecoin, and was supposed to maintain its dollar peg via a complex mechanism which involved swapping it with another free-floating token.

On Thursday, Terra developers halted the network’s blockchain to prevent attacks following the collapse of its algorithmic stablecoin and the related Luna token. The Terra blockhain, however, has since restarted.

The non-profit Luna Foundation is an affiliate of Terraform Labs, the company behind the TerraUSD.

Even stablecoins backed by traditional assets were showing signs of stress on Thursday.

Tether slipped below its 1:1 dollar peg, hitting a low of 95 cents around 0724 GMT on Thursday, based on CoinMarketCap data.

“The lack of transparency provided by Tether on the quality of commercial paper they hold to back the peg made it the obvious next target,” said BCB Group’s Usher.

“However, Tether is a very different animal to Terra, with a more proven ecosystem and I have far more confidence that when volatility subsides it can regain its peg and stability,” he said.

Paolo Ardoino, Tether’s chief technology officer, said in a Twitter (NYSE:TWTR) Spaces chat that the stablecoin had reduced its exposure to commercial paper over the last six months and now holds the majority of its reserves in U.S. Treasuries.

Tether, is the largest stablecoin by market cap, and, along with USD Coin and Binance USD, they account for almost 87% of the total $169.5 billion stablecoin market, according to CoinMarketCap.

The large number of centralised cryptocurrency exchanges and decentralised venues, each with their own liquidity profile and credit risk, was adding to price distortions across the market, Denis Vinokourov, head of research at Corinthian Digital Asset Management, said.

“The spillover effects into other stablecoins is in part driven by the fragmented nature of the market,” Vinokourov said.

“This credit risk, especially during the times of tight liquidity conditions and mass deleveraging leads to further price distortions.”

Market players are still assessing the impact of TerraUSD’s troubles on investors.

In its biannual Financial Stability Report on Tuesday, the U.S. Federal Reserve warned that stablecoins are vulnerable to investor runs because they are backed by assets that can lose value or become illiquid in times of market stress.

Graphic – Bitcoin: https://fingfx.thomsonreuters.com/gfx/mkt/xmpjoyaeyvr/Pasted%20image%201652338434667.png

Forex

Investment banks rush to cut yuan forecasts again after April revisions

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© Reuters. Coins and banknotes of China’s yuan are seen in this illustration picture taken February 24, 2022. REUTERS/Florence Lo/Illustration/Files

By Winni Zhou and Alun John

SHANGHAI/HONG KONG (Reuters) – Major investment houses are cutting their forecasts for the yuan for the second time in just three weeks as the Chinese currency’s recent sharp declines tore through their previous revisions, catching many off guard.

A triple whammy of slowing growth, COVID-19-related economic disruptions and aggressive U.S. Fed tightening has put strong downward pressure on the yuan, while Chinese authorities appear to be standing aside to let their tightly managed currency drop.

The spot yuan rate has tumbled more than 6% against the dollar in the last four weeks and was at 6.7992 per dollar on Monday, busting past the 6.71 median year-end forecast in a poll of nine banks in late April.

Several banks now see the yuan weaking to 6.9 or even hitting the 7 mark before the end of the year, levels not seen since the early stage of the pandemic in 2020.

HSBC said in a note that the currency had become stretched, “especially against the backdrop of China’s economy slowing and the Fed remaining firmly hawkish.

“Neither are new developments per se, but things have become more intense, which we believe warrants consideration for our forecasts.”

HSBC, cutting its yuan forecast for the second time in three weeks, now expects the yuan to trade at 6.75 per dollar at the end of the second quarter before bouncing to 6.70 at the end of Q3, compared with 6.60 and 6.62, respectively, after its previous revision.

The late April poll of nine banks had projected the yuan at 6.63 per dollar at the end of June, according to the median forecast. A majority of respondents expected the yuan to weaken further to 6.71 towards the year-end.

But the yuan’s latest fall, to its lowest in nearly 20 months and a rare gyration for a currency that has typically been tightly managed within a thin range, has led many analysts to project further weakness.

A slew of weaker-than-expected April economic data released on Monday and last week, including credit lending, retail sales and industrial output, reaffirmed market views that the world’s second-largest economy faces mounting headwinds as COVID-19 lockdowns take a heavy toll.

USD/CNY could rise fast to 7 if onshore COVID situations worsen with more lockdowns followed by severe supply chain disruptions,” Barclays (LON:BARC) said in a note.

The bank also noted the possibility, however, that the yuan could quickly retrace if authorities step in to prop up the currency or to bolster the economy.

“The downside risk comes from the People’s Bank of China (PBOC) leaning aggressively against further CNY weakness and a sharper decline in dollar than we expected; risk sentiment could also boost CNY in the case of massive stimulus. In this case, USD/CNY could see quick retracement to 6.70.”

Barclays lowered its yuan forecasts to 6.9 per dollar at end-Q2 from 6.3 previously, to account for a stronger dollar and foreign portfolio outflows.

Others, including Mizuho Bank and UBS, also trimmed their yuan projections to reflect bearish sentiment.

Ken Cheung, chief Asian FX strategist at Mizuho Bank, cut his year-end yuan forecast for a second time on Monday to 6.7 from 6.6.

Wang Tao, chief China economist at UBS, revised her year-end yuan forecast to 6.9 from 6.6 previously.

“USD/CNY may break 7 before end-year due to USD strength and a likely sharp weakening of China’s exports and general economy, but should settle below 7 by year end,” she said.

“This is because we expect the COVID-related economic impact to decline in the second half of the year, with growth momentum rebounding and market confidence improving.”

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Forex

Dollar Down, but Investors’ Flight to Safety Limits Losses

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© Reuters.

By Gina Lee

Investing.com – The dollar was down on Monday morning in Asia, starting the week near a 20-year high. However, investors are turning to the U.S. currency thanks to fears about global growth while cryptocurrency markets appeared to find some stability after a tumultuous week.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched down 0.02% to 104.38 by 11:42 PM ET (3:42 AM GMT). The index briefly shot past the 105 level on Friday, its highest since December 2002, after six successive weeks of gains.

The USD/JPY pair was down 0.23% to 128.89.

The AUD/USD pair fell 0.86% to 0.6879 and the NZD/USD pair fell 0.72% to 0.6237.

The USD/CNY pair inched up 0.06% to 6.7934. Chinese data released earlier in the day showed that fixed asset investment grew 6.8% year-on-year, industrial production contracted 2.9% year-on-year, Chinese industrial production grew 4% year-on-year, and retail sales contracted 11.1% year-on-year in April 2022. The Chinese unemployment rate stood at 6.1%.

The GBP/USD pair edged down 0.20% to 1.2236.

Investors have flocked to the safe-haven greenback due to concerns about the U.S. Federal Reserve’s ability to tame high inflation without causing a recession. However, worries about slowing growth arising from the war in Ukraine and the economic impact of China’s lockdowns to curb its latest COVID-19 outbreak.

“Broad dollar strength is being supported by a mounting global growth concern,” Barclays (LON:BARC) analysts said in a note.

Events to watch this week included U.S. retail and production data due on Tuesday, as well as public remarks from several Fed officials. “The focus will be on any potential reiteration/pushback on the notion that 75-basis point rate hikes are off the table for now,” the note added.

Markets are pricing in 50 basis point hikes at the Fed’s next two meetings, according to CME’s Fedwatch tool. However, the possibility of larger increases remains.

The disappointing Chinese data was also on investors’ minds.

“A weaker growth outlook in China is likely to keep commodity G10 currencies under pressure and the dollar supported,” according to the Barclays note.

The euro started the week near its lowest level since early 2017, thanks to the strong dollar and the European economy’s exposure to the war in Ukraine that was perpetrated by the Russian invasion of Feb. 24. Top European Central Bank officials are also due to speak throughout the week.

In Asia Pacific, the Japanese yen was a little softer on Monday morning at 129.43 yen per dollar. It managed its first week of gains since early March 2022 during the previous week. Concerns of an economic recession meant U.S. Treasury yields eased their recent rally. As yields remain low in Japan, the yen is vulnerable to higher U.S. yields.

Cryptocurrencies had a quiet weekend after the previous week’s turmoil driven by TerraUSD, a so-called stablecoin, breaking its dollar peg. Bitcoin was trading around the $31,000 mark after falling to $21,400 on Thursday, its lowest since December 2020.

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Central African bank regulator reminds states of crypto ban

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© Reuters. FILE PHOTO: Representations of virtual cryptocurrencies are seen in this illustration taken November 28, 2021. REUTERS/Dado Ruvic/Illustration

N’DJAMENA (Reuters) -Central Africa’s regional banking regulator sent out a reminder on Friday about its ban on cryptocurrencies, weeks after the Central African Republic, a member state, made bitcoin legal tender.

The Banking Commission of Central Africa (COBAC), which regulates the banking sector in the six-nation Economic and Monetary Community of Central Africa (CEMAC), said the prohibition was meant to ensure financial stability.

The announcement came as cryptocurrencies nursed large losses on Friday after the collapse of TerraUSD, a so-called stablecoin, rippled through markets.

The Central African Republic’s presidency announced on April 27 that bitcoin had been made legal tender, making it only the second country to do so after El Salvador.

At the time, analysts and crypto experts said they were puzzled by the move in one of world’s poorest nations where internet use is low, conflict is widespread and electricity is unreliable.

The government has provided few details about its reasoning and questions remain about implementation.

Reached by phone on Friday, government spokesman Serge Ghislain Djorie told Reuters that Central African Republic had received no official notice from the COBAC about a crypto ban, although he had seen the news in the press and on social media.

“We are waiting for the document to be officially transmitted before we can respond. It must be understood that each state has sovereignty,” Djorie said.

The banking commission held a special meeting on May 6 to examine the impact of cryptocurrencies in the zone, it said in the statement on Friday.

“In order to guarantee financial stability and preserve client deposits, COBAC recalled certain prohibitions related to the use of crypto-assets in CEMAC,” it said.

These include the holding of cryptocurrencies of any kind, the exchange, conversion or settlement of transactions relating to cryptocurrencies and a bar on them being used as a means of evaluating assets or liabilities, it said.

“COBAC has decided to take a number of measures aimed at setting up a system for identifying and reporting operations related to cryptocurrencies,” it added.

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