China Trade talks, ECB, BoE and CBRT

September 13, 2018 — Mitul Kotecha

Today marks the most interesting day of the data calendar this week.  Central banks in the Eurozone (ECB), UK (BoE) and Turkey (CBRT) all announce policy decisions while US CPI (Aug) is released.  The ECB and BoE meetings should be non events.  The ECB is likely to confirm its €15 billion per month taper over Q4 18.  The BoE monetary policy committee is likely have a unanimous vote for a hold.

The big move ought to come from Turkey.  They will need to tighten to convince markets that the central bank it is free from political pressure and that it is ready to react to intensifying inflation pressures.  A hike in the region of 300 basis points will be needed to convince markets.   This would also provide some relief to other emerging markets.

The big news today is the offer of high level trade talks from US Treasury Secretary Mnuchin to meet with Liu He (China’s top economic official), ahead of the imposition of $200bn tariffs (that were supposedly going to be implemented at end Aug).  This shows that the US administration is finally showing signs of cracking under pressure from businesses ahead of mid-term elections but I would take this with a heavy pinch of salt.

Mnuchin appears to be increasingly isolated in terms of trade policy within the US administration. Other members of the administration including Navarro, Lighthizer, and Bolton all hold a hard line against China.  Last time Mnuchin was involved in such talks with China in May they were derailed by the hawks in the administration.  So the talks could mark a turning point, but more likely they are a false dawn.  That said it will provide some relief for markets today.

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Equities weaker, US yields lower, USD softer

March 27, 2014 — Mitul Kotecha

The US Federal Reserve’s rejection of capital raising plans by several banks taken together with further confrontation between the US and Russia and a disappointing US durable goods orders report were sufficient to result in a sell off in equity markets, lower US yields and a weaker USD.

Gold failed to benefit in yet a further sign that its bull run has ended, with the metal honing in on its 200 day moving average at 1296.71. On the US data front headline February US durable goods orders beat expectations (2.2%) but core orders (-1.3%) were weaker than expected.

Although the lead for Asia is a weak one markets may still find some resilience due to expectations of policy stimulus from China. Similarly dovish talk from the European Central Bank will offer further support to market sentiment while undermining the EUR somewhat. On the data front today the main releases are US Q4 GDP revision (upward revision likely), and UK retail sales (rebound likely).

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High degree of investor caution

March 25, 2014 — Mitul Kotecha

Although risk aversion has declined from recently elevated levels there is still a high degree of caution from investors who are unwilling to take long term bets. The causes of market angst have remained unchanged over recent weeks namely Ukraine tensions, weaker growth in China and US data that has performed below expectations.

It is therefore unsurprising that in the wake of a weaker than forecast reading for Chinese manufacturing confidence yesterday and talk of more sanctions against Russia, European and US equity markets fell overnight and Asian equities have began the day on softer footing.

The Markit US manufacturing purchasing managers’ index (PMI) edged lower, but unlike the Chinese PMI, which remained below the 50 boom/bust level, the US reading was healthy at 55.5 in March. The Eurozone equivalent edged lower but continued to show that recovery was still in shape, with the March reading at 53.

The reverberations from Fed Chairman Yellen’s comments last week also inflicting some damage, with gold prices in particular succumbing to pressure and verging on a test of the 200 day moving average around 1296.83. A heavy slate of data today includes the German March IFO survey, UK CPI inflation, US March consumer confidence and February new home sales.

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Risk appetite firms

March 18, 2014 — Mitul Kotecha

Despite the decision by Crimea’s parliament to formally request accession to Russia markets risk assets performed well overnight, with US and European equity markets registering solid gains. Consequently US yields rose overnight while the USD made gains against safe haven currencies.

Market relief probably reflected the fact that the referendum itself passed without violence while the reaction by the West in terms of sanctions was not seen to have a particularly detrimental impact on sentiment.

China’s decision to widen its currency band also passed with little fanfare given that such a move was largely anticipated. There will be some positive pass through into the Asian session from the gains in asset markets overnight although a degree of caution continues to be warranted given the still precarious situation in the Ukraine and ongoing tensions between Russia and the West.

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What now for the CNY?

March 17, 2014 — Mitul Kotecha

News that China doubled its currency band (to 2% from 1% in relation to its daily mid point) will have reverberations across markets but the reality is that China has been building up to this for several weeks and now that it has happened there may be little incentive to push for more currency weakness.

The net result will probably be less volatility after an initial knee jerk reaction and some relief in markets that the China has actually gone ahead with the move after so much speculation. The reaction of the CNY is set to follow the same script as April 2012, with volatility set to ease once the initial reaction fades.

The weakness in the CNY had been engineered to incite more two way risk to a currency that for many months had been on a one way path of appreciation. China had been forcing the CNY weaker over recent weeks in order to deter speculators who had taken significant long positions in the currency playing for further currency strength.

CNY depreciation versus the USD (around 1.5%) since mid February may also have been a reflection of weaker economic data, with China releasing a series of data releases that had missed consensus forecasts, especially recent trade data.

Already both implied and realized USD/CNY volatility has been trading well in excess of past moves (as reflected in statistical significant readings in our Z-score analysis). Additionally risk reversal skews (3 month, 25 delta) have been flirting with its 2 standard deviation band indicative of the view that the options market holds an extreme view of CNY downside risks.

The main imponderable is what China does now. The band widening is clearly a further step along the road of freeing up the currency on the road to capital account convertibility. However, the reality is that the Peoples Bank of China (PBoC) still sets the daily fixing and the movement in the CNY will still largely depend on where this fixing is set.

Ultimately a move towards a more market based currency will need to allow the market to determine the level and movements in USD/CNY. This may still be a long way off. In the meantime it seems unlikely that the authorities will intervene as aggressively to weaken the CNY as they have done in recent weeks, with a breach of USD/CNY 6.15 likely prove short lived.

China’s still healthy external position and likely resumption of capital inflows will mean that appreciation pressure on the CNY will return and a move back to around 6.00 by end 2014 remains on the cards.

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