Overnight I quoted Goldman on the way to explaining why a short yuan bias was probably still a no-brainer trade despite Thursday’s epic short-squeeze engineered by the heavy hand of the PBoC and overseen by the all-seeing eye of the Politburo:
“The best times to gain exposure to $/CNY weakness have tended to be when China concerns were off radar screens or after periodic interventions that flushed out bearish speculative positions and provided attractive entry points,” the bank said, in a note dated Thursday.
Overnight, both the onshore and offshore yuan fell sharply, with the former sliding the most since January of 2016. “The offshore yuan is sinking because there is some recovery in the dollar, perhaps the unwinding of short-yuan positions has mostly been done, and it’s closing the gap with the onshore currency,” ABN’s Roy Teo told Bloomberg. Oh how quickly things change. “The squeeze will have a temporary impact,” added Luke Spajic, head of emerging Asia portfolio management at Pacific Investment Management Co.“But I don’t think it necessarily changes the challenge, and the challenge is they still have to worry about the $50 billion to $60 billion a month of outflows and what they’re going to do about the value of their currency. And they have to face the fact that the U.S. is probably going to keep hiking rates.”
Meanwhile, interbank rates in Hong Kong continued to reflect tight liquidity. 3-month HIBOR hit an all-time high at over 10%:
Bloomberg’s Masaki Kondo notes that if Beijing is successful at shoring up the yuan in the short to medium term, it may give the FOMC some breathing room when it comes to hiking rates. Important bullets via Bloomberg:
- At 21.9%, yuan has the highest weight in Fed’s index for dollar’s nominal effective exchange rate; that’s followed by 17.1% for euro and 12.0% for Canadian dollar
- Fed’s trade-weighted dollar index has correlation of 0.49 with USD/CNY, based on monthly changes over past 5 years; currency pair now up 0.6% after posting 2-day slide of 1.1%, steepest since at least 2007
- Stronger yuan will stem USD gains, allowing Fed to raise policy rates without being concerned about currency strength
- Offshore yuan slumps 1% after the daily fixing was weaker than predicted by Mizuho Bank and ANZ
- Shanghai Composite Index drops, halting four-day gain
- China says fund outflow curbs target short-term speculation
- China is ready to step up scrutiny of U.S. companies in the event President-elect Donald Trump takes punitive measures against Chinese goods, according to people familiar with the matter
- PBOC will likely increase its “management” of yuan rate expectations this year, according to a front-page China Securities Journal commentary
Meanwhile, a firmer yen and declines in auto makers hit Japanese shares on Friday. Toyota, Nissan, Honda, and Mazda all fell thanks to one man’s Twitter feed.
You tell ’em Mussolini.
In Europe, things are mostly quiet following a better than expected consumer economic confidence print. 3 out of 19 Stoxx 600 sectors are up and around 36% of Stoxx 600 members are trading higher, ~59% decline.
Of course Friday’s main event is the US jobs report. Here’s Goldman’s take:
We forecast that nonfarm payroll employment increased 180k in December, after an increase of 178k in November and 142k in October. On balance, labor market indicators were moderately strong in December, with improvement in the employment components of many service-sector and manufacturing surveys and a rise in consumer confidence to a 15-year high. The key labor market subcomponent of consumer confidence also hovered near its post-crisis high, despite a modest pullback from November. We also expect above-trend payroll growth in the transportation and warehousing industry, driven by elevated hiring related to strong online holiday shopping. On the negative side, initial jobless claims drifted higher and continuing claims posted the largest survey-week-to-survey-week increase in nearly a year. December’s relatively cold payroll survey week could also constrain payroll growth in weather-sensitive industries such as construction, particularly after the warmer-than-usual November.
As far as trading the numbers goes, at least some analysts say the market will be hesitant to show any conviction ahead of
coronation inauguration day. “[The numbers] may serve to curtail USD selling, [but] might not be large,” MUFG writes in a note. “The appetite of the market for establishing positions or taking fresh views is limited.”
Oil is up on news that Riyadh is sticking to production curb promises while gold is slightly lower.
Market recap via Bloomberg:
- S&P 500 futures down 0.1% to 2262.1
- Stoxx Europe 600 down 0.3% to 364.46
- MSCI Asia Pacific down 0.2% to 138.76
- US 10Yr yield up 1 bps to 2.35%
- Dollar index little changed at 101.54
- WTI oil futures up 0.4% to $53.96/bbl
- Gold spot down 0.2% to $1178.36/oz