Diary of a Financier

CNY FX crosses: The most important charts in the world right now

In Capital Markets, Economics on Thu 24 Sep 2015 at 12:03

Although Volkswagen is desecrating the German economy — spreading to greater Europe & even the US — the most important charts in the universe today are currencies.  Specifically, Chinese Yuan ($CNY) crosses against the Euro ($EUR) and Japanese Yen ($JPY).

To reiterate my thesis, the Renminbi is de facto pegged to the US Dollar ($USD).  The specter of the Fed raising rates strengthened USD, therefore strengthening CNY relative to other currencies.  Yet, a decelerating Chinese economy needs just the opposite; it needs a weakening currency to boost its competitiveness — as the economy has been slow to reallocate away from exports & fixed investment into consumption.

Therefore, the most important thing is CNY’s FX cross against other major currencies like $EURCNY and $JPYCNY EURCNY daily— a real-time barometer as to how protracted the impact a strong/strengthening Yuan is having on the JPYCNY dailyglobal economy.

In August, the PBOC devalued the Yuan by 1.9%, which at the time was declared a “one time adjustment in the fix.”  While it’s retraced a tiny bit of that devaluation, CNY remains off highs.

It’s critical for China that the Yuan not strengthen any further from these levels.  If CNY holds steady, the Chinese economy won’t likely experience resurgent sentiment until yoy comps lap the FX headwinds (~2/2016).  If China can intervene with monetary or (preferably) fiscal measures before YE2015, they should be able to accelerate the healing process.

With the BoJ and ECB continuing their material quantitative easing programs — as juxtaposed by a tightening Fed — China will likely require some policy intervention to stimulate the economy in the interim.

–Romeo

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