Wednesday 6 December 2017

CNH slides next year as USD rallies?

I am of the view that the USD could rally next year, for a while, as the Fed attempts to withdraw policy and the economy continues to tick along versus massive global short USD funding.

CNH has tracked the inverse of the USD pretty well for the last few years, so if the USD does rally into next year will be interesting to see if CNH/ CNY resumes the slide.

On a REER basis China is pretty expensive and is running large trade deficits with non-US/ EUR trade partners.

As China attempts to pull in the credit cycle, discussed in many other locations, it could drop the FX rate while trying to support nominal wage growth to support final/ aggregate demand and without the inflation it causes hurting competitiveness too much. 

That said we are talking maybe 8-10% annualised deval over several years, so hard to make money from the FX forwards, unless they hold back for a few months as the USD rallies and then get forced to make a more abrupt move in perhaps Q2.

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