RENMINBI AS A TRADE WAR PROXY & DOLLAR SHORTAGE(for macro nerds)
Updated
USD/CNY: Two detailed bullet points ;Series on Currencies(feedback's always welcomed) - 7th of December 2019
First of all, this chart is simply a guide on how to analyse Dollar:Renminbi as a trade war proxy. As there are many economic variations and possible outcomes for 2020 at this point in time, I will not give recommendations for this chart. These are my subjective technicals and I will not analyse them, so don't follow them blindly. More importantly, let's take a look at some of the macro and fundamental perspectives.
1. 7 is a key level for the USD/CNY. Somehow the cross in August coincided with the inversion in yield curves, and the height of the trade war fears. Data backing up the cross at 7 is the decrease in Chinese holdings of treasuries (Ref #1), YoY down -4.27%. This indicates, that China is attempting to create a stronger dollar environment that corresponds with higher treasury yields, in order to alleviate some of the trade war tariff pains(higher yields=stronger $). Of course, treasuries are a global market, and China isn't able to completely influence the dollar At the stage with all the noise, it's very hard to exactly know what the trade war outcome will be, so I've given some of the scenarios on the chart. Furthermore, as FED cut rates, so did the PBoC (despite higher CPI , pork's here to blame). This was their way of signalling that they're ready to devalue the yuan in case the trade war continues (Ref #2). The simplest way to read the Dollar/Yuan chart is with a dummy variable approach: If USDCNY<7= higher probability of a trade deal success and vice versa.
2. The DXY and USDSEK overlays combined with the 5-year lows in some of the emerging markets currencies(REF #5), indicating a global dollar shortage. These fears were somewhat dealt with as we had (Ref #3)three rate cuts this year and the start of QE:4, after the the repo market frenzy in August and September. Going into 2020, despite the FED being overly optimistic, I'm expecting that rates will further slide down to at least 1%. It all depends on how ambitious Trump is in terms of his trade war goals.
The importance of USDSEK , simply is the fact that Sweden is such an open economy and the effect of these events mentioned above can serve as a way to cut all the trade news noise. As expressed in the USDSEK chart, currently Swedish manufacturing numbers are well below 50, without the expected bounce for November(REF #6), despite the strong performance from equities. Along with other swedish economic data that's also performing poorly, without a doubt, this raises recession fears even further.
To conclude this analysis on the Dollar:Renminbi, as mentioned in the intro- at this point there are many possible variations and many factors that could be analysed. I've already written a dozen posts on the trade war and the 2020 elections and it seems that it's impossible to give an easy and simple answer. One thing to expect for certain in 2020, is a rise in volatility . As the election cycle nears, there might be an increased pressure on Trump to get a deal done, so hopefully we'll get a more clear picture of the outcome of the trade war. Nevertheless, phase 1 is somewhat unimportant. Practically all the important negotiation points are pushed for phase 2. Future may after all, seem interesting, but at the same time gloomy, and the show's just about to get started.
This is it for Dollar:Yuan, feedback is always welcomed!
-Step_ahead_ofthemarket-
________________________________________________________________________________________
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up and follow is greatly appreciated!
References & Disclosure:
1. Chinese Treasury holdings: ticdata.treasury.gov/Publish/mfh.txt
2. PBoC Prime rates: tradingeconomics.com/china/interest-rate
3. FED Rates super cycle:
4. Treasury Yields:![10Y US TREASURY NOTE|PREMIUM[LONG-TERM]YIELD ANALYSIS|PART 2/2"](https://s3.tradingview.com/k/kH1DVEC1_mid.png)
5. Latin(emerging) markets currency index: bloomberg.com/quote/LACI:IND
6. Swedish Manufacturing data: tradingeconomics.com/sweden/manufacturing-pmi
Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content- contact me through any of my social media channels.
First of all, this chart is simply a guide on how to analyse Dollar:Renminbi as a trade war proxy. As there are many economic variations and possible outcomes for 2020 at this point in time, I will not give recommendations for this chart. These are my subjective technicals and I will not analyse them, so don't follow them blindly. More importantly, let's take a look at some of the macro and fundamental perspectives.
1. 7 is a key level for the USD/CNY. Somehow the cross in August coincided with the inversion in yield curves, and the height of the trade war fears. Data backing up the cross at 7 is the decrease in Chinese holdings of treasuries (Ref #1), YoY down -4.27%. This indicates, that China is attempting to create a stronger dollar environment that corresponds with higher treasury yields, in order to alleviate some of the trade war tariff pains(higher yields=stronger $). Of course, treasuries are a global market, and China isn't able to completely influence the dollar At the stage with all the noise, it's very hard to exactly know what the trade war outcome will be, so I've given some of the scenarios on the chart. Furthermore, as FED cut rates, so did the PBoC (despite higher CPI , pork's here to blame). This was their way of signalling that they're ready to devalue the yuan in case the trade war continues (Ref #2). The simplest way to read the Dollar/Yuan chart is with a dummy variable approach: If USDCNY<7= higher probability of a trade deal success and vice versa.
2. The DXY and USDSEK overlays combined with the 5-year lows in some of the emerging markets currencies(REF #5), indicating a global dollar shortage. These fears were somewhat dealt with as we had (Ref #3)three rate cuts this year and the start of QE:4, after the the repo market frenzy in August and September. Going into 2020, despite the FED being overly optimistic, I'm expecting that rates will further slide down to at least 1%. It all depends on how ambitious Trump is in terms of his trade war goals.
The importance of USDSEK , simply is the fact that Sweden is such an open economy and the effect of these events mentioned above can serve as a way to cut all the trade news noise. As expressed in the USDSEK chart, currently Swedish manufacturing numbers are well below 50, without the expected bounce for November(REF #6), despite the strong performance from equities. Along with other swedish economic data that's also performing poorly, without a doubt, this raises recession fears even further.
To conclude this analysis on the Dollar:Renminbi, as mentioned in the intro- at this point there are many possible variations and many factors that could be analysed. I've already written a dozen posts on the trade war and the 2020 elections and it seems that it's impossible to give an easy and simple answer. One thing to expect for certain in 2020, is a rise in volatility . As the election cycle nears, there might be an increased pressure on Trump to get a deal done, so hopefully we'll get a more clear picture of the outcome of the trade war. Nevertheless, phase 1 is somewhat unimportant. Practically all the important negotiation points are pushed for phase 2. Future may after all, seem interesting, but at the same time gloomy, and the show's just about to get started.
This is it for Dollar:Yuan, feedback is always welcomed!
-Step_ahead_ofthemarket-
________________________________________________________________________________________
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up and follow is greatly appreciated!
References & Disclosure:
1. Chinese Treasury holdings: ticdata.treasury.gov/Publish/mfh.txt
2. PBoC Prime rates: tradingeconomics.com/china/interest-rate
3. FED Rates super cycle:
4. Treasury Yields:
5. Latin(emerging) markets currency index: bloomberg.com/quote/LACI:IND
6. Swedish Manufacturing data: tradingeconomics.com/sweden/manufacturing-pmi
Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content- contact me through any of my social media channels.
Note
Edit: Apologies for all the typos, as always I don't have an editor. One obvious typo is "FRED" instead of FED rates, and others.This chart will be continuously updated. Next analysis will be on equities.
-Step_ahead_ofthemarket-
Note
Just a thought provoking update:Question is, what's the absolute potential upside for the SPX in 2020. Best scenario, a deal gets done phase 1 and even if we have 2 more rate cuts to 1%, it would be +10-15%, to ¬3500ish. Even this is a stretch. But there are not sellers either, because the downside is limited mostly by QE. Meaning, expectations should be that market will be sluggish for the next 1-1.5 years before something major occurs.
-Step_ahead_ofthemarket-
Note
Trade deal got done. As expected, some tariffs are staying. 7 seems to be holding still, hints to a probability that renminbi will keep devaluating.Fyi, chart may display differently depending on from which browser and operating system you are viewing it from. Most of my charts, I am doing them on my tablet. Perhaps, in the future I will do them on my laptop, since the text display seems to be quite bad as I am looking at the chart.
Trade active
Expecting Chinese yuan to sell-off post deal announcement!Let's see how good or bad the deal is. Phase 2 is just a fantasy atm.
_StepAhead_ofthe_market_
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