Macro Digest: Deficits matter... again
Chief Investment Officer
The current macro landscape sees China and its currency taking centre stage while developments in Japan and the JPY are also at an important juncture. We look for a lower CNY and a higher JPY.
The yuan, the yen, and the yardstick
CNY: Part of the current 'Chinese panic' has to do with the country's rising current account deficit. The key conclusion here? China needs a weaker yuan.
We see a test and a potential break of 7.0000 (USDCNY) inside the next year.
JPY: Across the East China Sea, Japan's currency also stands at a crucial turning point: USDJPY, in fact is close to being our highest-conviction trade; we remain short from the 112.10 level reached on August 1 with our stop-loss set at a daily close around 112.70.
A return to the '80s?
Macro-wise, the world is reverting to a theme not seen since the 1980s and '90s: debt and deficits matter. Rises in both the absolute and the marginal costs of money are shifting the global flow towards a home bias.
In the '80s and '90s, we sold deficit currencies and bought surplus FX. This game could be on its way back.
Chinese current account and Q4 SMA trend
Observe how when China “needed” fiscal and monetary stimulus in 2008/09, it had plenty of room; now the opposite is true. One clear sidebar to the current Sino-US trade war is the countries' under-acknowledged co-dependence. Both the US and China how run deficits, meaning that the need for foreign direct investment as a funding tool for said deficits is growing. China has grown up, but now needs more interaction and opening up of capital accounts to share the burden of refinancing and rolling over its debt.
This in turn means that Europe and – more importantly – Japan need to fund this gap. Japan’s $2.4 trillion in overseas investments, however, is now under some pressure to move home, but Japanese investors are now getting a better deal staying home as FX hedging costs eat the of excess yield.
Only Italy with its big tail-risk can compete in the five-year maturity while in the 10-year, France + Belgium + Spain and Italy are similar but not in excess on domestic return...
The big capital flows are starting to reverse and with US growth most likely having peaked and China restarting its growth engine, the rest of the world – including emerging markets and commodities – should receive some support.
For now, however, the focus is squarely on JPY and CNY (plus the ever-weaker TRY).
FX will lead and a signal could be forthcoming very soon.
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.