Macro Digest: Deficits matters again - revisit to 1980s ? CNY and JPY in focus - deficit vs. surplus

Part of the "Chinese panic" is the rising current account deficit….

 

Conclusion:

 

China needs weaker CNY- we see test and potential break of 7.0000 inside next one year

JPY is a turning point – close to being our highest conviction – We remain short from yesterday's 112,10 with s/l 112-70 (on daily close)

 

Macro wise – world is changing back to a theme not seen since 1980s and 1990s – debt matters and deficits matter – Rising both marginal and absolute price of money changes global flow towards home bias  - in 1980s and 1990s we sold deficit currencies and bought surplus FX – this game could be back.

 

 

This is China current account and the 4Q SMA trend – Source: Bloomberg LLP

 

 

 

Observe how when China "needed" fiscal and monetary stimulus in 2008/09 they had plenty of room – now however the opposite is true. A bi-story of the present trade war is clearly the "non-acknowledged" co-interdependence…. Now both the US and China runs deficits… meaning need of FDI is increasing as a funding tool for the deficits. China has grown up, but now needs more interaction and opening up of capital accounts to share the burden of refinancing and rolling over debt

 

This means Europe and more importantly Japan needs to fund this gap. Japan's 2.4 trillion USD overseas investment however is under some pressure to move home…but Japanese investors is now getting a better "deal" staying home as FX hedging cost eats all the of excess yield:

 

 

 

Only Italy (big tail-risk) can compete in 5y while in 10y France + Belgium + Spain & Italy is similar but not in excess on domestic return….

 

 

 

Source: Bloomberg LLP

 

The big capital flow are starting to reverse and with US growth most likely having peaked and China restarting growth engines – rest of world, including EM and commodities should get some support……but for now focus in squarely on JPY and CNY (plus ever weaker TRY)…. FX will lead and a signal could be forth coming very soon.

 

Safe travels,

 

Steen

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

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