Macro Digest: Deficits matter... again

Steen Jakobsen

Chief Economist & CIO

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

Enlarge
Source: Bloomberg

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.

Enlarge
ᅠᅠ

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...

Enlarge
Source: Bloomberg

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.

You can access both of our platforms from a single Saxo account.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)