So think about this for a second.
The PBoC’s attempt to put the brakes on with a weaker-than-expected Friday fix notwithstanding, the yuan has strengthened steadily against the dollar, hitting a one-year high this week as traders looked right through the headline miss on July export/import growth and focused instead on the sizeable trade surplus. Between that, favorable yield diffs, ongoing efforts to curb capital outflows, the counter-cyclical adjustment factor that was added to the fixing mechanism during the short squeeze of late May/early June, and the broad dollar’s steady decline, USDCNY has been a one-way trade of late.
Those interested in more detail on that are encouraged to read “The Market Has A New Safe Haven Asset – But You Missed The Rally.”
Juxtapose that with what we’ve seen lately in KRW, which is suddenly beset by worries about the standoff between Trump and Kim in the North.
See where I’m going with this? “It’s hard to find a more compelling Asia FX relative value argument than bullish yuan versus bearish Korean won,” Bloomberg’s Mark Cranfield wrote on Thursday, adding that “the yuan is behaving like a high-yielding haven just at a time when investors are asking whether Korean assets need to have a serious correction.”
Good point. Now have a look at this:
To be sure, there’s probably some bias in there given the importance of tech on the Kospi, but nevertheless, it looks to me like CNYKRW may be more than a “new Asia risk barometer” (as the above-mentioned Mark Cranfield puts it).
It looks to me like it might me a useful alternative global fear gauge – at least in the near-term – i.e. as long as the current dynamic driving the juxtaposition outlined above persists.
Oh, and if you’re thinking about getting long CNYKRW, you’ve probably missed it. Credit Agricole’s Dariusz Kowalczyk – who was on it in March – just recommended taking profits on his long reco.