Head of FX Strategy
Summary: The market tried to set-off the reflationary fireworks as the first session of 2021 got underway, but while big moves up in some commodities and in particular crypto assets opened the year with a bang, the only move that is sticking well as the market rolls into North American hours is the move in the Chinese currency higher after weeks of quiet at the end of 2020. What gives?
FX Trading focus:
USDCNH plunges at a rapid clip – what gives?
The Chinese renminbi jolted higher on the first session of the New Year, a surprise move of considerable magnitude, and one that is no accident and sends a message – but what message? Arguably, the CNY strengthening is merely playing a bit of relative catchup with other US dollar crosses, as for example, AUDCNY exactly touched the 2020 high again on the last days of 2020 before dipping on this CNY rally. Perhaps that is the very message, that China wants to manage its currency in such a way as to keep it relatively strong, if not so strong as to break the range against the official basket, nor against any major trading partner By that way of thinking, then, AUDCNH might be a low beta trade for further CNH resilience and strength. This would be part and parcel of its strategic move to attract capital via a strong and stable currency and higher policy rates, allowing it to absorb demand from global Covid-19 stimulus and the luxury to keep a relatively tight policy to allow some scale of deleveraging that it never really pursued in previous cycles of recent date.
The other argument might be that in the reflationary world that threatens from both Covid-19 supply disruptions and the arrival of fiscal forcing, that China wants to maintain a firm currency to guard against rising price pressures from commodity imports. In any case, the focus from here will eventually shift on whether China plans to allow the renminbi to pull higher above the range high that marked the top in recent weeks – coinciding with two prior peaks in the last couple of years – and that level is only about a percent above the current level.
Chart: USDCNH
After a few weeks in which the USDCNH exchange rate largely ignored the weaker US dollar, the renminbi jolted higher to start the year in one of the biggest moves in recent memory and below the largely symbolic 6.50 area – never a particular chart level in focus in other cycles. I’ll hang on to the view that China is happy to keep the renminbi at the strong side of the range in the official basket without a major isolated appreciation (this view encouraged recently when the CNY stopped appreciating at the twice-touched area near 96.0), but will watch closely if that basket level moves above 96.0, which could suggest a willingness to allow it to appreciate further to the next major high around 98.0. Eventually, it will be interesting to see how the US-China relationship develops under a Biden presidency and how the exchange rate would react to higher inflation as well as a deepening dis-engagement of the two economies.
Georgia run-off races tilting Democratic?
After the terrible experience of believing in what proved horrible poll quality during the 2020 election, I am reluctant to even bring polls into the discussion, but there has been a move in favour of Democrats in the latest series of polls in Georgia, suggesting that both of the seats in the Senate run-offs there could yet go Democratic. This would create a 50-50 split in the US Senate that would allow VP Harris to cast the tie-breaking vote. These elections tomorrow are pivotal stuff, though far less so than had Biden won a commanding majority in both houses, as key conservative Democratic senators could still make themselves suddenly very important as key swing votes for further fiscal measures or if the climate agenda is seen as too radical for local constituents (thinking especially of West Virginia Democratic senator Joe Manchin here). Still, the bipartisan attitude toward bigger spending has witnessed a massive shift since the Obama years, and cleverly crafted, centrist initiatives from a Biden administration could find support from a cohort of more traditional Republicans with or without the two Georgia seats, a smaller population than they were formerly, but still not banished from existence by four years of Trump. The market’s initial read if the Democrats take both Senate run-off seats will be USD negative on the presumption of more fiscal stimulus potential).
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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