Once again the fears over China's slowdown, global growth faltering, and the fallacy of US analyst hockey sticks are biting at the ankles of fiction-peddling talking heads. With copper plunging and the USD Index resurgent, as Bloomberg's Mark Cudmore warns, the risk-aversion sparked by China in January is on course for an imminent replay…
Deja vu all over again…
With the last few weeks really diverging…
As Bloomberg's Mark Cudmore warns, we are on the verge of the 'China Panic' trade once again…
The risk-aversion sparked by China in January is on course for an imminent replay unless the trend of the weakening yuan amid a strengthening dollar is checked.
Chinese data this weekend missed expectations across the board. But that isn’t the real concern — retail sales expanding at 10.1% year-on-year is still an exceptional pace of growth even if it’s a slowdown relative to the rate of the last decade. The real problem is the creep higher in USD/CNY.
It’s an expectations game. The more the currency pair climbs, the more traders fear that unsustainable capital outflows will force a more sudden yuan devaluation and result in global turmoil. Panic started in January when the rate climbed above 6.56 yuan. Today’s fix was within 0.4% of that level.
On Friday, the offshore yuan traded at the weakest level relative to the onshore yuan in more than three months. That’s a good barometer of building speculation.
The critical issue now is that the U.S. dollar is appreciating again. The Bloomberg Dollar index is up 2.8% in the last two weeks and another 2% wouldn’t be an unreasonable consolidation in the context of it dropping more than 7% in the previous three months.
That previous dollar slide distracted from the fact that yuan depreciation never abated. Against the basket, it’s been weakening at an average rate of almost 1.2% per month for the last five months.
The market’s single-minded focus on USD/CNY is crucial and it’s also why disaster can still be averted. It will require the PBOC to temporarily suspend their yuan-weakening policy for as long as the dollar is climbing.
Otherwise, prepare to batten down the hatches for the coming storm.
Of course, the last time traders panicced about China, bad things happened to stocks…
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