By Kevin Sollitt
Last week we touched on the theme of possible CNY revaluation, or de-pegging, as some might say.
Everything we have seen and heard over the past several days has done nothing to dissuade us from this view. The fact that initial reports from the APEC summit say the subjects of currency manipulation or undervaluation were seemingly avoided at the meetings arguably lend further strength to the idea, in our market-based opinion: if China were on the verge of encouraging or allowing further Yuan appreciation, this fact would surely not be advertised ahead of any pending official announcement.
Interestingly and according to last week’s PBOC quarterly report, a key phrase that says the bank will keep the CNY basically stable was removed. Indeed, reference was made to capital flows and currency movements being the main components for future determination of Chinese foreign exchange policy, which can only be a one-way move for the CNY, higher.
Add in to the mix Secretary Geithner’s comments that China normally keeps its word on such issues and we believe that moves are underway to make a gradual adjustment, sooner than later.
That said, we do not expect anything imminently as any such move coinciding with President Obama’s visit to China would not send the right message politically. Although China is currently and obviously in the driver’s seat in this relationship, they are not naïve enough to think the US would accept unfair terms of trade and are no doubt wary of various tariffs and embargo procedures that could be introduced on Chinese exports to the US.
So for the simple reason that the CNY revaluation theme is likely to be omnipresent but the timing of its introduction will remain a ‘known unknown’, we will consider it as part of our macro-strategy and continue to be aware of how other markets may react to it in the meantime.
On that note, we highlighted the AUD and NZD currencies last week and are watching closely for signs that last week's complete rejection of the 9350 region in AUD and 7450 region in NZD could provide the basis for a cyclical end to the upside of these crosses.
New Zealand Producer Prices are due for release Monday night and anything less than inflationary numbers will likely serve as another chink in the armor of the NZD. We expect the unit to trade much lower in the near future on benign interest rate expectations, a crowded long market (carry trade) and fundamentals that are deteriorating given the uncompetitiveness of NZ exports due to what even the RBNZ has called an overvalued currency based on the market not recognizing the fact that their economy is in a ‘dull recovery’.
Initial idea of the week is to sell NZD against USD, the greenback likely continuing its firmer tone of late due to anecdotal evidence of a rebound in domestic demand which will be proven or not by retail sales and housing data as early as Monday. The buck was also helped in part by speculation that global imbalances may be undergoing review and the ECB’s line in the sand circa 1.5050 seems to have been respected by the market.
As always we recommend keeping positions light with reasonably tight stop-losses in place due to current market uncertainty and lack of trend, but the Kiwi certainly seems ripe for a correction, having risen by around 50% against the USD from its lows earlier this year. Are things that bad in the US and that great in NZ?