dollar euro FX geopolitics USDCNY yuan

Bears Crying Wolf And China As Machiavelli (Revisited)

"When asked their worst trades this year, they mostly cited buying volatility, credit protection, or equity puts."

Two things: crying wolf and the yuan.

The tension between Washington and Ankara – which you’re reminded stems in large part from Erdogan’s endless quest to effectively force the extradition of arch nemesis Fethullah Gulen – is just the latest reminder of how truly fraught the geopolitical backdrop has become in the Austin Powersish world in which we’re forced to live and trade.

But this is also a world governed by central bank liquidity, the market-policymaker communication loop, and indiscriminate ETF flows, all of which serve to reinforce the existing dynamics – to strengthen the feedback loops that make suppressed vol. a self-fulfilling prophecy. So it does not pay to rebel – “you can say no, but it is inconsequential.”


Here’s SocGen’s Kit Juckes on this:

The diplomatic row between Washington and Ankara is showing no signs of abating. But there is still no wider contagion. This morning sees marginally higher bond yields, higher equities (led by the Kospi) and stronger Asian currencies (led by the won).

At a recent conference, when investors were asked what they are scared of, many cited a further grind higher in risk assets. When asked their worst trades this year, they mostly cited buying volatility, credit protection, or equity puts. It’s easy for market strategists to warn that asset prices are too high but being trampled underfoot in a bull market is as painful as being caught out by a bear market.


In his Tuesday night, Juckes also revisits his theory – which is probably less “conspiracy” and more “reality” than he gives it credit for being – that the recent resurgence of the reflation meme in the U.S. is actually down to Chinese policy. You can read more on that in “Here’s What’s Really Going On: ‘A Machiavellian Read,’” but here’s Kit’s latest color on the dynamic:

The (negative) correlation between EUR/USD and USD/CNH has been stronger in 2017 than it has been for a long time. I’ve written before about how USD/CNY bottomed-out just before EUR/USD peaked, and just as we saw the low point in US bond yields. There’s a nice conspiracy theory that this is all down to Chinese policy to manage both a relationship with the US and the trade-weighted value of the Yuan. China is also quietly increasing the Yuan’s importance as a currency for trade, or at least for Chinese oil imports, while the PBoC Governor is stressing the importance of relaxing capital controls as the economic becomes more open. All of this is interesting this morning because along with higher equities, generally positive risk sentiment and a slightly weaker dollar, we come in to find the USD/CNH level sharply lower, for a second day. Does this mean the dollar’s bounce – and the euro’s correction – is over? Or does it mean I need to remind myself that watching a kettle boil (or a correction in FX markets in this case) is a counter-productive waste of time?


So there are some quick thoughts to get you started on a Tuesday.


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