FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that the ongoing decline in industrial metals suggests that China’s ‘old economy’ remains in recession.
Key Quotes
“Over the balance of 2016, a more pronounced and broader deceleration in China’s domestic demand than already embedded in our central forecasts could amplify pressures for a devaluation of the Chinese currency. After policy interventions, the offshore CNH is priced to weaken by a meagre 2.5-3.0% against the US Dollar over the coming 12 months. Should the Chinese authorities opt for a step adjustment in the currency’s peg to the Dollar, in order to regain room to cut domestic rates without losing reserves, deflationary pressures across the advanced economies could intensify. The goal posts for all Emerging Market FX crosses would also move, and another round of currency weakness ensue. To be clear, our central scenario envisages a fiscal expansion alongside structural reforms, and some monetary easing.”
“We would see interventions on the currency as part of a redesign of the currency peg once the economy has stabilized. But this is admittedly one of the largest risks for asset markets over the year to come. Our EM FX basket trade is designed to hedge some degree of weakness in China and US rates increases, although in such an eventuality the broad EM complex would come under pressure and differentiation strategies are less reliable.”
(Market News Provided by FXstreet)