Macro Digest: Why PBOC countercyclical measures is boost to EM/China and a sign of top in Dollar...

 

China reintroduces countercyclical measures on CNY fixing & signals support for market

 

Action: China is openly supporting a stable CNY and through this "commits" to intervention and support of economy:

Reaction: This is big support for Chinese stock market which we believe is close to its low with final test being the new tariffs kicking in on September 5^th

Trade recommendation: Buy China A-shares ETF- MCHI:XNAS @ market open 61.30 with stop/loss @ 57.00 on close (Chart below) + This confirmation of potential top in US$ strength as "floating dollars is increasing"….

 

 

It's becoming more and more evident that PBOC and Yuan is a key ingredient in Emerging Markets valuations (and overall Dollar direction) – the shift as with most things Chinese is gradual yet with big potential marginal impact.

 

The measure is a commitment to keep the Yuan stable and through this stability create less outflow/down pressure on CNY which will translate to less US Dollar buying overall. It's part capital control, part confidence in economy but most importantly: This is seen as China's willingness to once again "support" the market and the economy which means this is good for Chinese stocks and Emerging Market overall. (See chart below)

 

In Friday's statement, the China Foreign Exchange Trade System cited the strengthening dollar and the trade friction as the main reasons investors kept bidding down the yuan. The reapplication of the "countercyclical factor," it said, could help the yuan remain largely stable. (Source: WSJ – China Central Bank Reintroduces Measure to Bolster the Yuan)

 

Financial Times:  This move is an attempt to stave off two risk related to rapid currency depreciations; speculative capital outflows and rising trade tensions with Washington" said Eswar Prasad, an expert on China's financial system at Cornell University

 

Yuan Counter-Cyclical Formula May Replay 2017 Stock Boom (Bloomberg)

2018-08-27 00:47:34.567 GMT

 

By Kyoungwha Kim

(Bloomberg) -- For a reminder of how yuan policy can set off a boom for mainland shares, we only need to look at last year's action.

USD/CNY slid from 6.9 to 6.5 in the seven months after the PBOC introduced its new yuan fixing rule in May 2017 to stem market volatility. Consumer stocks led the CSI 300 Index of China's largest companies in a strong rally over that period.

Remember, China drew down $1 trln of its FX reserves from 2014 to 2016 without containing the yuan's depreciation. The PBOC's fixing adjustment proved to be very powerful, helping to engineer strength in the yuan and the boost to consumers'

purchasing power lit a fire under local enterprises. As MLIV noted recently, mainland stock markets just need a stable floor to set off a strong rally and the yuan shift will provide that.

 

 

China USDCNY & Shanghai Stock Market under different "countercyclical measures"

 

 

Source: Bloomberg

 

More importantly overall remember that the best future direction of the US Dollar is driven by the net change of future expected growth between US and China – (The change in US growth next 6-12 month minus change in China growth next 6-12 month)

 

We have for the past weeks been focusing on this cyclical change whereby we expect a peak to have been established in the US economy, and an acceleration incoming from the Chinese economy as monetary policy and infrastructure spending is increased to counter a too tight deleveraging process. This will mean stable CNY, weaker US Dollar in our opinion which supports both our believe that China is close to low (with the ultimate test being the 200 billion September 6^th new tariffs)

 

 

 

 

The counter-cyclical-measures is "secret" or rather we know the input but not the weights between the different components: 

 

Mid-point rate = Closing rate + change in currency basket + discretionary change or in Natixis excellent piece from August 18^th, 2017: China's exchange rate policy: Adding a "countercyclical factor" to gain control:

 

 

 

 

This is the ETF mentioned – iShares MSCI China ETF – weekly chart courtesy of my good colleague Kim Cramer who warns that violation of supporting could set up further weakness- hence we operate with recent low being intact on any sell-off…

 

 

 

 

 

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Steen Jakobsen  |  Chief Investment Officer

 

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