Founder & Chief Market Strategist - SAV Markets, SAV Markets

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

FX & Rates

Sometimes it is not what the market does but rather what the market does not do that can be more telling.The USD is down almost across the board following concerning sentiment data from the US which also took yields lower. BUT…Why is USDCNH unchanged?It brings us back to the conversation of ‘currency wars’The Renminbi basket has been trading near its multi year highs for several weeks. It is perhaps why the Chinese changed their RRR policy a few weeks ago. Recent data reflects a more relaxed recovery in China as it is worse than expected – see retail sales and industrial production as latest examples. The Covid situation in China is far from over as news, including partial closure of ports, clearly shows. In basic terms China is uncomfortable with its current situation and needs support. Given the rise of the Renminbi in broad terms over the past year, it appears now might be the time for that support to come in the form of a weaker currency.It is with this in mind that we must pay further attention to EURCNH which is turning from the covid panic lows of 2020. What business does it have trading around 7.60? The price action developments suggest we move higher. The technicals on the chart suggest the same. The logical path following the height of the Renminbi basket also points to the same, especially if this is the start of a decent enough short term move down on the USD.This possible tactical ‘rotation’ or ‘USD diversification’ on part of China (if indeed that is what we are seeing) could add further support to EURUSD, which once again has held on to good levels at 1.17.

Sometimes it is not what the market does but rather what the market does not do that can be more telling.The USD is down almost across the board following concerning sentiment data from the US which also took yields lower. BUT…Why is USDCNH unchanged?It brings us back to the conversation of ‘currency wars’The Renminbi basket has been trading near its multi year highs for several weeks. It is perhaps why the Chinese changed their RRR policy a few weeks ago. Recent data reflects a more relaxed recovery in China as it is worse than expected – see retail sales and industrial production as latest examples. The Covid situation in China is far from over as news, including partial closure of ports, clearly shows. In basic terms China is uncomfortable with its current situation and needs support. Given the rise of the Renminbi in broad terms over the past year, it appears now might be the time for that support to come in the form of a weaker currency.It is with this in mind that we must pay further attention to EURCNH which is turning from the covid panic lows of 2020. What business does it have trading around 7.60? The price action developments suggest we move higher. The technicals on the chart suggest the same. The logical path following the height of the Renminbi basket also points to the same, especially if this is the start of a decent enough short term move down on the USD.This possible tactical ‘rotation’ or ‘USD diversification’ on part of China (if indeed that is what we are seeing) could add further support to EURUSD, which once again has held on to good levels at 1.17.

Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

In our monthly trade ideas recap note, we provide a performance update of the trade recommendations in FX and rates that we make weekly and discuss the new recommendations as well as those we closed over the past month. We have made a total of 21 trade recommendations so far, of which 15 are in the money.

In our monthly trade ideas recap note, we provide a performance update of the trade recommendations in FX and rates that we make weekly and discuss the new recommendations as well as those we closed over the past month. We have made a total of 21 trade recommendations so far, of which 15 are in the money.

Alpha Bites: Performance Summary of Trade Recommendations – August 2021

As a group, Asian currencies have underperformed the broad EM complex this year. Several factors are behind this underperformance: delay in the economic recovery due to the slow pace of vaccination, differences in monetary policy stances with much of the rest of EM already raising rates, and aggressive FX interventions. With these factors still broadly applicable, we see no reason for Asian currencies to outperform in the near term. Instead, we find differentiation among countries in Asia providing relative-value opportunities.Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

As a group, Asian currencies have underperformed the broad EM complex this year. Several factors are behind this underperformance: delay in the economic recovery due to the slow pace of vaccination, differences in monetary policy stances with much of the rest of EM already raising rates, and aggressive FX interventions. With these factors still broadly applicable, we see no reason for Asian currencies to outperform in the near term. Instead, we find differentiation among countries in Asia providing relative-value opportunities.Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

FX Dashboard: Will Asian Currencies Continue to Underperform?

Cross Asset Strategy

Developments over the past 24 hours have meant that US 10Y breakeven is now at its highest for more than a month. Importantly the level highlighted yesterday at 2.38% has given way. The setup now argues for a move to 2.55% - close to the trend highs seen in MayUnless nominal yields rise by more than 15bps, real yields are either going to stay unchanged at low levels or move even lower into negative territory, as they have started to do again todayAt the same time developments in China’s equity markets remain bearish which is now beginning to feed through to the currency.With Chinese and European authorities both on the dovish side, is this the time for the Fed to stay on the fence or be hawkish? Instead, could a dovish Fed provide the trigger for a weakening USD (perhaps ex USDCNH) and ultimately a rise in Gold?

Developments over the past 24 hours have meant that US 10Y breakeven is now at its highest for more than a month. Importantly the level highlighted yesterday at 2.38% has given way. The setup now argues for a move to 2.55% - close to the trend highs seen in MayUnless nominal yields rise by more than 15bps, real yields are either going to stay unchanged at low levels or move even lower into negative territory, as they have started to do again todayAt the same time developments in China’s equity markets remain bearish which is now beginning to feed through to the currency.With Chinese and European authorities both on the dovish side, is this the time for the Fed to stay on the fence or be hawkish? Instead, could a dovish Fed provide the trigger for a weakening USD (perhaps ex USDCNH) and ultimately a rise in Gold?

The RRR cut by PBOC last week has thrown the market into confusion. Our view is that this is not the beginning of an aggressive easing cycle, rather a preemptive move to ensure that the economic recovery stays in place. However, the move has led to concerns about the extent of economic weakness in China ahead, which if true could be negative for the renminbi and, in turn, for EM FX.Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

The RRR cut by PBOC last week has thrown the market into confusion. Our view is that this is not the beginning of an aggressive easing cycle, rather a preemptive move to ensure that the economic recovery stays in place. However, the move has led to concerns about the extent of economic weakness in China ahead, which if true could be negative for the renminbi and, in turn, for EM FX.Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

FX Dashboard: Spillover Risk from China to EM FX

China

The Chinese renminbi (yuan) is the official currency of The People's Republic of China. 

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CNY (USDCNY CURNCY)

What About the Renminbi?

Latest developments across FX markets lead us to ask questions about recent Renminbi strength and if that is about to change. Watch EURCNH

Shyam Devani

Alpha Bites: Performance Summary of Trade Recommendations – August 2021

We provide a performance update of all our trade recommendations along with discussing the new trades from last month. We have made a total of 21...

Gautam Jain, PhD, CFA

FX Dashboard: Will Asian Currencies Continue to Underperform?

Asian currencies have underperformed and are likely to continue doing so because of the impact on growth and monetary policy from the low...

Gautam Jain, PhD, CFA

Bonds & FX: Here Comes Trouble

US real yields are likely to remain at trend lows or move even deeper into negative territory. With China and Europe both dovish, is the Fed going...

Shyam Devani

FX Dashboard: Spillover Risk from China to EM FX

The RRR cut by PBOC last week has led to concerns about the extent of economic weakness in China ahead, which if true could be negative for the...

Gautam Jain, PhD, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)