China Updates: responding to questions regarding the Yuan-yen mean reversion
Market Strategist, Greater China
Summary: After my note last Friday and our Head of FX, John Hardy’s article commenting on the potential of Yuan-yen mean reversion in the making, we have received some questions about the merit of the idea. This follow-up note sets out tentative responses to three most raised questions.
Why on earth will the BoJ ever need to address the question of rising inflation? As March CPI came at +1.2% YoY, Core CPI (ex fresh food) at +0.8% YoY, and Core Core CPI (ex fresh food and energy) at -0.8% YoY, the BoJ does not seem to need to worry about inflation at all. On the contrary, the BoJ should be worried about not meeting its 2% price stability target. However, the CPI numbers have been depressed by an one-off reduction in mobile communication plan charges in April 2021. Mobile communication charges account for 2.8% of Japan’s core CPI. According to Nikkei, excluding a 52.7% drop of mobile communication charges, Japan’s Core CPI was about +2.2% YoY in March.
In the April CPI report that is scheduled to released on May 20, the mobile communication base effect from last April will be gone. According Nikkei’s survey, economists are forecasting a 2% print for April Core CPI and for Core CPI to stay above 2% for most of the remaining months this year.
Doesn’t the BoJ consider the incoming jump in Core CPI being ‘temporary’ and pledge to maintain its ‘overshoot’ commitment’? While the BoJ acknowledges that inflation rate will surge in the April CPI data, Governor Kuroda considers the rise in the incoming rises in CPI numbers would be ‘temporary’ and the BoJ should persistently continue with its current aggressive monetary easing.
We acknowledge the fact that under its “overshooting commitment”, the BoJ is committed to “continue expanding the monetary base until the year-on-year increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. However, with the strong likelihood of Core CPI going above 2%, it will bring the scenario of BoJ adjusting its yield curve control (YCC) policy back to traders’ radar. We agree that it will be premature to look for any such changes in this week’s BoJ monetary policy meeting but traders may start positioning in the coming weeks for the June meeting. Didn’t the U.S. Fed say that inflation was ‘transitionary’ last summer?
Didn’t China’s PBoC cut reserve requirement ratio for forex deposits to stop the renminbi from weakening?. Yesterday, the PBoC cut the reserve requirement ratio for forex deposits by 1 percentage point, bringing it from 9% to 8% effective May 15. There is about USD1.05 trillion equivalent of forex deposits in China so this 1% cut will increase the loanable forex liquidity in the banking system by about USD10.5 billion. Through the cut in the reserve requirement ratio for forex deposits yesterday, the PBoC is sending a signal to the market that it considers the pace of depreciation of the renminbi over the past five sessions excessive.
On the other hand, by cutting only 1 percentage point, and not even reversing the 2 percentage point increase made in last December to prevent the renminbi to appreciate then, the PBoC seems intentionally not to decisively push back the markets’ drive to weaken the renminbi. The 8% level is still much higher than the 5% level over the 14 years from 2007 to as recently as May 2021.
We suspect that the PBoC welcomes an orderly depreciation of the renminbi, in particular to reverse the renminbi’s sharp appreciation versus its trading partners such as the Japanese yen since September last year amid a deteriorating outlook for exports.
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?
Energy crisis could turn energy stocks into secular winnerWith long-term expected returns for the global energy sector close to 10%, we look at 40 stocks that could be set to cash in.
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.