29 Mar 2016
CNY: Tail-sizing – Deutsche Bank
Research Team at Deutsche Bank, tries to answer the question that how large was the tail on Chinese growth and FX now.
Key Quotes
“Some suggested China was not the main tail risk for markets anymore, rather it was Europe (refugee crisis, Brexit, terrorism). With China stimulating again, some investors believed this had reduced the growth tail for now.
For CNY, better reserves and growth numbers in the next 1-2 months could still break the back of surviving CNY bears with further positioning to squeeze. Although non-committal on the near-term, most investors agreed there was a trade-off between growth stability and FX stability in China in the medium-term, with policymakers likely to choose the former in the end.
Everyone appreciated the relationship of USD/CNY to US-China rate differentials, the risk of hedging on an estimated $1tn in MNC retained earnings, and agreed that a return of USD strength would upset the current sweet spot of basket weakness and spot stability. Trading convictions varied: some felt all CNY bears were dead in the long-run, others could be enticed by the 2-3% breakevens on USD/CNH forwards, while one investor liked to avoid CNY entirely and play long Latam/short Asia for the “China growth over CNY” theme.
Even if most investors agreed CNY weakness was a “when” not “if” question, it was difficult to answer. Some proposed the conspiracy theory that PBOC would weaken right before the June Fed. Others felt they would surprise when the market was most complacent, positioning was lightest, and domestic balance sheet adjustments were complete (almost there?).
Others felt that if China could navigate from domestic outflows to foreign inflows, or keep macro-prudential measures tight, they might keep CNY stable for months. Inclusion in JPM GBI-EM bond index was not regarded as imminent, and generally seen as more impactful for large sub-10% EM weights than China itself.”
Key Quotes
“Some suggested China was not the main tail risk for markets anymore, rather it was Europe (refugee crisis, Brexit, terrorism). With China stimulating again, some investors believed this had reduced the growth tail for now.
For CNY, better reserves and growth numbers in the next 1-2 months could still break the back of surviving CNY bears with further positioning to squeeze. Although non-committal on the near-term, most investors agreed there was a trade-off between growth stability and FX stability in China in the medium-term, with policymakers likely to choose the former in the end.
Everyone appreciated the relationship of USD/CNY to US-China rate differentials, the risk of hedging on an estimated $1tn in MNC retained earnings, and agreed that a return of USD strength would upset the current sweet spot of basket weakness and spot stability. Trading convictions varied: some felt all CNY bears were dead in the long-run, others could be enticed by the 2-3% breakevens on USD/CNH forwards, while one investor liked to avoid CNY entirely and play long Latam/short Asia for the “China growth over CNY” theme.
Even if most investors agreed CNY weakness was a “when” not “if” question, it was difficult to answer. Some proposed the conspiracy theory that PBOC would weaken right before the June Fed. Others felt they would surprise when the market was most complacent, positioning was lightest, and domestic balance sheet adjustments were complete (almost there?).
Others felt that if China could navigate from domestic outflows to foreign inflows, or keep macro-prudential measures tight, they might keep CNY stable for months. Inclusion in JPM GBI-EM bond index was not regarded as imminent, and generally seen as more impactful for large sub-10% EM weights than China itself.”