BREXIT YUAN DEVALU: USDCNH - SNEAKY FX FIXING? SELL SPX & FTSE
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At the start of 2016 the PBOC began aggressively devaluing the off-shore Yuan against the USD, imo in an attempt to start the year with a competitive export:import advantage - with the aim of making 2016 a headline "come back" year for China amid the growing GDP growth and Credit bubble worries.
As a result Equities across the board sold-off (-8.5% in a few days) as non-chinese Exporters globally feared that their biggest market/ growth market was coming under pressure, as the relative value of their USD exports soared, as Chinese import demand would fall significantly and as a function of the depreciation relative to the USD.
Whilst the initial highly correlated move hit equities by -8.5% (7 days), however when fully priced, the CNH devaluation fears took the SPX down 13% to 1808 lows in just 12 trading days.
The PBOC Deval intervention took CNH to lows of 6.7550 and low-closes of 6.6900.
Brexit - Under the radar and sneaky PBOC FX Intervention?
1. Fast forward 6 months - the Days going into Brexit USDCNH traded at almost exactly the same fix as the pre-deval January level at 6.58 (blue line), then on the most volatile brexit days, the 24th and 29th, PBOC fixed the Yuan 1000pips lower to 6.6850, just above the extreme January lows at 6.6900 - Since then CNH has continued drifting lower, and now has eclipsed the shock January low closes of 6.6900, currently at 6.6960, which is now a new 6 year low.
- This begs the question, did the PBOC plan this as a way to get their goal of competitive depreciation achieved WITHOUT the negative press/ market impacts that were seen in January? The answer is unknown but by looking at the Yuan prices on brexit day and the day after, it certainly looks like it - 1000pip devaluation in 2 days, thats bigger than any deval in CNH's previous history (even from January).
How to trade it?
1. Imo this trade is a no brainer, given the PBOC seem happy to keep fixing CNH higher and have shown no signs of stabilising/ appreciating - with the last 6 daily candles in the green, my bets are that the PBOC in the near-term think they have gotten away with the deval, in the midst of all of the brexit effects e.g. Central Bank information flows are high, the brexit news itself and general market volatility are all acting as distractions - thus the SPX hasnt priced any of this deval YET despite it being more extreme than what caused the 8-13% equities sell off in January?
- I have to admit, it has taken even me until now to realise this sly depreciation, nonetheless this trade (short Equities) is a one up on the market currently as most still havent noticed and continue to focus on central bank action.
As a result Equities across the board sold-off (-8.5% in a few days) as non-chinese Exporters globally feared that their biggest market/ growth market was coming under pressure, as the relative value of their USD exports soared, as Chinese import demand would fall significantly and as a function of the depreciation relative to the USD.
Whilst the initial highly correlated move hit equities by -8.5% (7 days), however when fully priced, the CNH devaluation fears took the SPX down 13% to 1808 lows in just 12 trading days.
The PBOC Deval intervention took CNH to lows of 6.7550 and low-closes of 6.6900.
Brexit - Under the radar and sneaky PBOC FX Intervention?
1. Fast forward 6 months - the Days going into Brexit USDCNH traded at almost exactly the same fix as the pre-deval January level at 6.58 (blue line), then on the most volatile brexit days, the 24th and 29th, PBOC fixed the Yuan 1000pips lower to 6.6850, just above the extreme January lows at 6.6900 - Since then CNH has continued drifting lower, and now has eclipsed the shock January low closes of 6.6900, currently at 6.6960, which is now a new 6 year low.
- This begs the question, did the PBOC plan this as a way to get their goal of competitive depreciation achieved WITHOUT the negative press/ market impacts that were seen in January? The answer is unknown but by looking at the Yuan prices on brexit day and the day after, it certainly looks like it - 1000pip devaluation in 2 days, thats bigger than any deval in CNH's previous history (even from January).
How to trade it?
1. Imo this trade is a no brainer, given the PBOC seem happy to keep fixing CNH higher and have shown no signs of stabilising/ appreciating - with the last 6 daily candles in the green, my bets are that the PBOC in the near-term think they have gotten away with the deval, in the midst of all of the brexit effects e.g. Central Bank information flows are high, the brexit news itself and general market volatility are all acting as distractions - thus the SPX hasnt priced any of this deval YET despite it being more extreme than what caused the 8-13% equities sell off in January?
- I have to admit, it has taken even me until now to realise this sly depreciation, nonetheless this trade (short Equities) is a one up on the market currently as most still havent noticed and continue to focus on central bank action.
註釋
Trading strategy:1. Short FTSE100 @6600-6800 resistance with a 5700TP (January lows) - once artificial BOE easing rally is finished, likely near 66-800 FTSE will plummet in the medium term as 1) this structural CNH deval prices and hits UK export stocks as it did in Jan; 2) brexit (still not priced in equities)/ Political uncertainty drags on economy and stocks - especially financials, which has a knock-on effect of corp credit tightening; 3) The underlying risk-off bias which has gone un-priced as yet (safe havens up 21% in 2016) prices - not to mention reaching near ATHs, with 10y resistance.
2. Short SPX @2100 with a 1985TP - SPX at these levels looks an attractive short 1) as discussed CNH depreciation which is a macro issue for all stock Exporters to China (biggest market/ growth market) hasnt priced any revenue downside yet like they did in January (-8-13% previously). 2) underlying risk-off bias is still yet to reprice risk lower (2016 safe havens up 21% av. Gold 28%) + only 2% away from ATH - favourable short lvls; 3) Earnings sell-off likely around the corner as investors derisk/ hedge against "shocks"; 4) Brexit induced CB easing/ dovish rally likely to fade soon as it isnt structural growth and FOMC rates are recovering in the back-end (Dec Hike looms). SPX has a more conservative target vs FTSE as less brexit downside & its a structurally stronger index with growth stocks.
3. Id also suggest dynamically hedging these positions with 1) Long high growth and low China revenue individual stocks e.g. Goog, FB and/ or 2) shorting GBP index or a GBP cross, lower GBP hedges any potential BOE easing rallies that the FTSE short may negative experience, and also short GBP is a solid trade to have regardless of any FTSE risk you have on the table.
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