The fear of unwinding carry trade in China

Chinese carry trade had been underpinned by the expectation of mid-term or long-term appreciation of RMB or semi-pegging with USD for a long time at least.

It is known that official investment from carry trade is about 1 trillion dollar, but unofficial or real carry trade is almost 3 trillion dollar, market participants say. How a huge amount!

By the way, since CNY's rapid devaluation caused rising bond yield in China with the fear of capital outflow and thus, tightening of liquidity condition. Credit spreads widened, as well. But, for recent a few days, the bond yield seems to be in peace. Below chart is Chinese government bond 5 year rate in an inter-bank market.

What does it mean? Technical relief on a process of upward trend? Or because market participants expect additional RRR or/and base rate cut?

Someone is arguing that this CNY devaluation is in line with preventing carry trade money from the outflow. If then, is almost a 5% of depreciation last week sufficient for China? If not, depreciation of RMB would be more speedy until markets rarely expect additional devaluation. On the side of real interest rate or liquidity conditions, toward the end of year, the monetary condition would ease automatically as CPI would be higher. If then, PBOC would complete their mission when they are alive until winter. However, during this period, carry trade money and Asian EMs would be suffered.

CNY devaluation weighs on Asian EM economy

Unless this is so-called currency war directly, it would weigh on Asian EM economy clearly.
Below chart was attached in Citi's report. We maybe exclude trade through Hong Kong in Taiwan in this number. Anyway, we could understand current rapid depreciation of MYR and tumbling Malaysia's financial assets price with this. Asian EM had been relatively calm against other EMs such as LATAM and CEEMEA since both of in 2H2013 of QE taper tantrum and 2H2014 of dropped oil price, which was underpinned firm current account balance and the status of importers of oil, respectively.

However, the environment as Chinese starts to depreciate their currency, whether it lasts for a long time, the pace is much faster, or not, Asian EMs are likely underperformer at least.
In Malaysia, the fear from this seems almost come, and the woes is maybe coming in Korea recently.

How long does this picture last? I have no idea, but the momentum looks somewhat strong, for now.

Indian Politics Trip up Modi's Overhaul Plans

via WSJ,
Political calculation and parliamentary gridlock are putting the brakes on Prime Minister Narendra Modi's plans for economic revitalization 15 months after Indian voters gave him an overwhelming mandate for change.
Following nearly a month of partisan bickering, lawmakers ended a parliamentary session on Thursday last week without passing a centerpiece of Mr. Modi's agenda, which is a constitutional amendment to replace a thicket of differing state taxes with more business-friendly nationwide levy.
--------
In everywhere, it seems difficult to reform economic policies and systems due to solid relationship structured by the older... Though India is one of the free country out of aging, their given internal economic relationship seems so solid. This maybe is the main negative effect of aging society...

15.08.14 Daily Summary

1. 8/14 was a holiday in Korea, so I'm posting this summary in my home, one day later. This post would include Asian markets in Friday and Western markets in both of Thursday and Friday.

2. PBOC appreciated CNY against USD after 3 day's devaluation to 6.3975, a little bit, by 0.05% and it dampened Asian financial markets' volatility. Chinese SHCOMP index seemed to be somewhat calmed. It would be continued current narrow movement in a range for some time under woes of deteriorated economy against moderate recovery underpinned by properties and faith of government's policies.

3. Contrary to other Asia markets showed muted volatility, in Malaysia, the triple weakness was there. As the fear of capital outflows increased further, MYR recorded weakest level since 1998 and local bond yield soard as well. This deteriorated financial condition in Malaysia is the worst in Asia, in line with declining foreign reserves, different from others. Recent strong USD or weak CNY are leading only differential movement in each country rather than convergence collapse like in late 1990s. This aspect could be continued further, until global economy fall into devil's ground or global economy expands. I expect second one, a global reflation.

4. UST yield rose during 2 days as economic indicators showed somewhat solid increase, but yield curve flattened. Under current circumstances including lowering pressure in both of growth and inflation with low commodities price and the woes of Chinese economy and the potential impact on so-called global currency war, somewhat solid economic indicators push the short-end rate higher mainly than long-end rate. But, overal indicators would remain subdued movement for a few months, so the spread between short and long-end rates would move in a range. This range, 10s30s in UST of mid 60bps showed very narrow. Nevertheless, if the spread widens, we should add the long-end tenor until start of 4Q. When Fed hike the rate in September, the curve will show enhanced volatility. If Fed will likely hike funds rate further, long-end rate should be pushed higher at last, but in the case of reversal scenario, long-end rate could tumble further. However, in the case of 2nd scenario, how big is the room for additional narrowering spread? It's somewhat skeptical, so we don't need to be hurry to buy 30yr treasury bond.

5. As US economic indicators showed firm growth and Euro zone's 2Q GDP was disappointed in contrast, the spread of UST and European bond widened further. On the side of the cycle of inventory/sales, the burden is weighed in US, but that is unlikely in Euro area, so recent wide spread doesn't seem to be continued.

6. US July's retail sales increased 0.6% from a month earlier, and 2.9% yearly. The rise followed upwardly revised readings of no change and 1.2% in June and May, earlier reported as a 0.3% decline and a 1.0% gain, respectively. It means approximately, total 0.5pp higher than before following beat of July's consensus a little bit, around a same number. Recent characteristics in US economic indicator are those, if one indicator showed negative output, in a month later, the data shows upturn again to earlier level. This could mean solid economic conditions in US, so Fed will likely raise interest rate in September.

On the other hand, business inventories were stocked more than sales, so the inventory/sales ratio increased further in June. But, this is June's data, and we saw the resilient July's sales data.

7. PPI was up 0.2% in July higher than consensus of 0.1% rise as gasoline price soared by 1.5%.
Industrial production increased 0.6% monthly double expectations of a 0.3% rise and the capacity utilization was 78.0% higher than last month's 77.7% in July. It was the biggest rise since November last  year. But, yoy growth is flat at 1.3% and hovering at its low level.

8. In contrast, University of Michigan consumer sentiment index slipped as business expectations collapsed to 11 month lows. It maybe contained the burden of inventory and oversea's economic weakness. The pace of recovery could be very moderate for a few months at least.

9. Oil price and BDI tumbled further again during last 2 days. They were down in Thursday and a little bit rebounded in Friday. The woes of oversupply in oil market countinue to weigh on the price. Albeit this could continue further, the price level seems to hover the lower bound.

10. Gold price jumped after China reveals it bought another 19 tons in July. Apparently, Chinese government aims the CNY to be included in IMF's SDR. If then, recent devalued CNY would not mean currency war.

11. Euro area's 2Q GDP posted below, additionally.

12. During last days, parilament in Greece and EU approved 3rd financial bailout, 85 billion euro for 3 years. But, IMF remains some skeptical Greece to decrease the nation's debt for some years. Whether IMF is expected to join in bailout or not, those look like behind our considering.

EZ 2Q GDP, Subdued Expectation despite Advantages from Weak Euro

Eurozone 2Q growth of 0.3% was below expectations, 0.4%, reflecting inventory cuts. Ex-inventories growth was 0.4-0.5% quarterly, so it means about 2% yearly growth rate indicating to continue somewhat firm growth.

However, in terms of growth breakdown, main portion of growth is spurred by weak currency boosting exports sector. That said, as consider possible spill-over effect from advantages by exports with weak currency to capex and so on, 2Q GDP seems somewhat lower, albeit it was affected by declined inventory mainly, especially in Germany. Other core countries including France are similar with Germany, but they were moderate.

In regional contributions, Spain was a star country, clearly. Spain recorded 1.0% growth rate on quarterly base following 0.9% in 1Q, which means annual almost 4% growth.

Among core countries, Germany's 2Q GDP grew 0.4% from a quarter earlier, mainly amplified by exports sector, as wrote above. The positive contribution of German net exports can be roughly estimated at 1% in last quarter by LSR. So, excluding net exports, real GDP was well down with weak capex growth.

Current relatively weak economic activities despite some advantages from weaken currency mean additional encouraging economic sentiments are needed more. Considering this, it's somewhat difficult that long-end rate starts to fly higher, until late of this year.
 

15.08.13 About allowing US oil firms to export and USD appreciation

This picture showed high correlation between US imports of petroleum and real effective exchange rate drew in inverted axis.

In this environment, US maybe starts to export oil as early as start of next year.

What is the real purpose of US governors? And where are EMs going now?

15.08.13 time to fly in German Bund market?

German Bund rate declined not reflecting later US treasury yield movement.
On the other hand, current yield meet lower bound of lead span and lag line meet lead span, either.
It's the time to fly in Bund market toward yield soaring, for a short time, and tonight at least.

Thus, I could delay additional short cover...

15.08.13 Daily Summary

1) It was too frustrated that US long-end treasury yield ended higher than yesterday, albeit the rate was plunging by more than 8 bps in 10 year tenor in Asia market. UST 10y rate was up 0.7bp and 30y was up 3bp, so yield curve steepened. News said this weakness in bond market reflected not too bad US equity market despite additional CNY devaluation, the burden of bond auction, and the expectation that Fed could hike the base rate at last.

Current financial environment is just within volatility? Maybe yes, but it's so hard to define whether this is simple range market or not. Anyway, I bought UST 30yr yesterday in early London market and lost, although it was a short-cover a little bit...

2) Oil price gained too small while BDI plunged by -69pt to 1,093 further and recorded bigger loss than yesterday's -35pt. As I noted in yesterday's daily summary, this trajectory should pass weaker momentum in line with diminishing seasonal effect. In contrast, if BDI show up-turn, we may re-think about global trade momentum which have shown big negative trend.

Oil price was a little bit up in line with postive forecast about future's demand of oil, news said... I don't think this is really reflected. Something like this couldn't be any materials in oil market.

3) US job opening rate in June released yesterday. It showed solid growth rate, 3.6%.

(We should draw the Beverage Curve with this to check where we are. Let's do this, later.)

4) PBOC devalued CNY against USD in 3 consecutive days, by 1.11% to 6.0410 today. Following yesterday's intervention, they held the special interview today. PBOC denied the possibility of continuing CNY depreciation. Some economists started to recognize it would not be currency war.

5) Today's markets seemed to be somewhat relief in line with this or just moved on technical influences. The main Asian equity indexes rose including Korea and Shanghai A. USD/KRW dropped 16.6won to 1,174.2 won, lower than 2 days ago.

6) Korean bond yield rose as well with hawkish BOK monthly meeting. BOK hold policy rate unanimously. They consider CNY devaluation as only risk factor, not a current threat.

7) Non-Asian EM looks like free from Chinese issue, yesterday, either. It could mean the downside risk of commodities market would be limited from now on...

15.08.12 Daily Summary

1) UST 10y yield dropped more than 8bps last night as react the shock of Chinese RMB devaluation in line with tumbled US stock market with about 1% decline.
Market expects Fed should consider this aspect of so-called currency war from China.

2) Oil price turned weak again and BDI tumbled more than recent move after a long time.
Is the end of bullish momentum amplified by seasonal effect including increasing trade of agriculture and in Pacific seas? Had we dreamed for a short time?
How is oil price? (See another attached post today)

3) I was maybe incorrect because I thought this devaluation by PBOC was not so surprising news as market participants expected this change for some time.

4) This is likely correct that "Beijing signals growth fears with surprise move" via WSJ. On this side, market reactions seems somewhat reasonable.
Meanwhile, IMF welcomed the change of China. What is what they really want?

5) PBOC devalued CNY to lower fixing rate against USD by 1.6% to 6.3306 once again.Their comment that they shot the fixing rate rapidly as one-off adjustment reflecting their willingness of restructuring FX system was just bluffing!
While USD/CNY spot was up a further 1.5% above today's fix, USD/CNH jumped 1.9% in response. And then, should PBOC lift fix rate further tomorrow? Maybe yes...

(Additionally, PBOC seemed to intervent FX market to prevent exchange rate from too devaluation further. So, we expect the pace of additional depreciation would be slow, a little bit...)

6) Chinese economic indicators were disappointed in July.
I.P was up 6.0% yoy, less than 6.6% of consensus and 6.8% of last month.
Retail sales increased by 10.5% which is similar with 6.6% of both of consensus and last month's data.
FAI growth was at 11.2%, lower than 11.4% of consensus and 11.5% in June.
July's auto sales was disappointed, either. This contracted by -6.6% yoy following last month's decline and in two consecutive months.

7) In line with additional RMB depreciation, USD/KRW reached almost 1,200 won, ended at 1,190.8 won increased by 11.7 won today. KOSPI was down -0.56% as shape a hang-in man candle.

8) UST 10y rate tumbled further, by about 8bps in Asian futures market. And it was same with Korean treasury market.
However, in Chinese on-shore bond market, the yield is pushed higher following CNY devaluation in terms of the fear about capital outflow. Credit bond is weaker than treasury, especially. Govi 5y was up 8bps yesterday.
If then, how will be in Korean bond marekt? Different from China?
Current long-end yield level seems very low. (see the another post written today)

9) Greece and creditors agreed on bailout deal. Greece could take 86 mil. euro in financing over the next three years. Sadly, however, they seems much far from market interests.

10) Abe adviser sees a need for economic stimulus via WSJ. Does the power remain in Abe, yet?

11) BRL was strong rather than depreciated further. Somewhat interesting... RUB seemed not affected by CNY, neither.

12) Anyway, I bought long-end UST for moderate short-cover...

15.08.12 Short thought of Korean 10 year treasury yield

We are hovering 3Q... Long-end bond yield will likely hover, either, unless my forecast about GDP and CPI fail to follow real data with downside risk.

15.08.12 EUR/USD...it's not my picture, absolutely...

I've believed EUR/USD should start to fly with somewhat volatility after the ramification of convergence in all kind of moving average. And today, EUR is showing strong move soundlessly cracking not only convergence spot of from 5MA to 200MA, but also a negative cloud. The momentum of strengthening EUR seems so strong.

However, it is not my picture, absolutely.

I've seen EUR appreciation as driven by Euro area's fundamental and monetary policy amid improving economic indicators spurred after the end of stress test in European banks and upward inflation. I expected EUR appreciation against USD, albeit I believed US Fed should start monetary tightening earlier than them, seen in 1994's rate hike by Fed.

Contrary to my hope, EUR is moving higher due to weakening expectation of USD appreciation caused by re-start of currency war as China attends. In this circumstance, strong EUR could mean negative impact on the sentiment of economic recovery and inflationary pressure in line with possible additional dovish stance from ECB.

(Additionally, the money flow seemed to turn back to Euro area invested in Asian fund in EUR due to the woes from Chinese event)

So, somewhat frustrated... I should start to buy long-end UST modestly.

On the other hand, how will oil price react on this? Is this mean upside potential for oil?

15.08.12 Chinese Carry Trade

to be written...

15.08.12 Oil Price, Falling Knife? or Possible Rebound with Triple Bottom and Divergence of MACD?

Oil price looks like a falling knife in terms of fundamental issues including lackluster Chinese imports demand, foreseeable oil exports by US as early as start of next year, and possible continuous of USD appreciation as Fed would likely turn to be dovish under stressful circumstance in EMs.

Albeit most materials in oil market have signaled secular bear market, the chart of WTI is going with divergence of MACD for more than 1 month meaning possible rebound soon. If then, the trajectory would be with triple bottom on the technical side.

A little more than 40 dollar per a barrel seems so low in terms of historical level in oil price...
What would this mean?

15.08.04 S&P500 Earnings vs. Sales

US Corporations' earnings showed weakness since USD turned to be strong, mid of 2014, and recent earnings growth rate yoy reached negative boundary.

On the other hand, the sales growth from a year earlier has remained above 2% for recent some years, and showed somewhat solid.
Moreover, recent data in 2Q is showing firm sales growth, further.

And then, what is the point that US governors really want? Strong USD? or Weak USD?

15.08.05 US Real disposable income growth vs. consumption growth

Since mid-2014, both real income growth and real consumption growth increased continuously maybe due to tumbled oil price and lowered inflation. But, in terms of the pace of real consumption, it was somewhat disappointed, while economists argued that US spending would increase to follow soaring real disposable income eventually. Moreover, since start of this year, both of income and spending in real term, started to decline moderately, albeit the growth level remain high, more than 2% as maybe additional USD appreciation was limited recently.

If then, US officers want strong USD more than now? But, companies earnings have been deteriorated since then...

15.08.06 US Trade Deficit since late 1960s

EUR/USD market arose in line with the increased US trade deficit since late 1960s, because the foreign investors holding USD in on-shore market in US had became afraid US government to prevent to bring out to overseas for USD soon.

And then, who were foreign investors made and spurred EUR/USD market in London? They seemed somewhat oil-power related someone.

Indeed, OPEC countries' imports consumption expenditures were paid on EUR of about 70% of total imports demand.

15.08.12 Chinese "Real" Imports

*calculated by main counterparts' trade data, US, EZ, Japan, Korea and Taiwan.

Is the Chinese economy really serious?

2015.08.11 Daily

US treasury yield rose about 6~7bps and curve was steepened as I expect the range market during 3Q and this level seemed the short-term trough in both of 10yr rate and 10s30s spread. Interestingly, Stanley Fisher, the vice chairman of Fed, showed dovish stance to upcoming Fed monetary policy as he looked like somewhat afraid about low inflation and wage pressure, so he did not think that now is not adequate timing to raise policy rate. Under this circumstance, the bond yield should have declined further with curve flattening. However, yield curve was bear steepened in line with increasing risk appetite as US equity market price was up depending on dovish stance of Fisher and Chinese stock market robust yesterday. That said, the bond yield did not react to possible future’s monetary policy, and I think it means that the bond market is within a range now and the price or yield shows only technical movement.

On the other hand, USD turned to be depreciated as Fed’s vice president was dovish, and commodities price somewhat gains although copper price declined to 6 years low in LME market due to disappointed imports data in China announced in last weekend. Yes. All of movements look like a range trading.

But, there was a big event today. In fact, I’m so curious it is a real surprise event because market players have betted on it for some time. It was CNY depreciation against USD. PBOC raised the USD/CNY exchange rate’s mid-point by 1.9%, a historical high increasing rate, to 6.2298. Although, PBOC announced it was one-off adjustment reflecting the willingness of restructuring the system of suggesting CNY fixing rate, the width of depreciation a day seemed huge as market expected other policies would come earlier, including RRR cut or widening daily width of volatility. Additionally, market participants continue to expect further depreciation of CNY. In on-shore Chinese FX option market, the bet on CNY weakness has increased. And as July’s trade data showed very weakness and IMF suggested more market-friendly FX policy, this CNY depreciation is not too surprising event, I think, it would be only small event. However, anyways, many markets moved rapidly reflecting this event. KTBF prices and USD/KRW were soared, while KOSPI tumbled. Market looks likely reflect both of currency war and negative impact on Korean exports economy. On US treasury market, the yield declined maybe as this ghost of currency war weigh on the Fed’s decision of monetary tightening to delay later this year, not September.

Chinese measure that they try to depreciate their currency would lead the additional USD strength and downward pressure in commodities market first, but Chinese economy and commodities price could rebound at last. Under this thought, I should maintain the market view that all of movements will be within in a range. But, I am somewhat afraid because of the possible US treasury rate down additionally. Should I buy long-end bond, right now? Economic indicators even in EZ, have showed vulnerable signals and inflationary pressure is same. So, I am somewhat embarrassed.

On the other hand, with technical analysis, WTI price chart shows the MACD divergence for a month which means upside potential for the price soon. The chart looks like triple bottom, either. If then, why? And, under this lower pressure of oil price environment, why US Congress try to allow oil exports from as early as start of next year? I really want to know the reason.

2015.08.04 Daily

I planned to increase duration position in the global aggregate fund in this week with the expectation that the yield could increase pass-through bought due to portfolio adjustment in end of last month. Contrary to my hope, US treasury rates were down further last night as economic indicators showed mixed signal about fundamentals. Shout I have bought bonds last night? It’s somewhat difficult question because current rates seem very low level. In fact, the 10 year treasury rate was down to the level seemed significant, cross spot of 120MA and 200MA. In addition, its lag span met three points at the same time, which was 60MA, 120MA and the top of positive cloud.

Current rates must be critical level with these perspectives. So, if current bond market is in range movement, the bond yield would robust tonight. I see the global market as the procedure of convergence toward its one point with preparing to make a new big trend. It would continue until 3Q this year, I guess, so the timing of buying bonds should be delayed on this low level. Oil price tumbled yesterday further as Brent oil price declined toward under 50 dollar per barrel. The expectation of inflationary pressure started to deteriorate rapidly and this concern has been influenced in recent flattening bond market. But, oil price is nearby last trough, so we expect short-term rebound from this number and if then, the oil market means the range movement, either. BDI increased yesterday further, although Chinese manufacturing PMI data was very disappointed. Main analysts in this market argue recent rebound of BDI would continue for some period, but they see the only short-term bullish market with the seasonal effect in summer from agricultures and pacific areas. This sounds almost reasonable, but the momentum to increase seems too strong.

If 10 year US treasury yield is down under current critical level, the possibility of short-term trend to bull market would increase. Nevertheless, there are some hurdles in the chart, and the yield should rebound to meet this critical level at last. The problem is that we do not know when the yield re-meets that level. So, if the yield is lower than current level, I would be very frustrated and I have to buy some bonds to add duration. If not, hopefully, I will earn some time to think about an adequate level to buy.

2015.08.03 Daily

In terms of the short-term market view, global bond market could try to be bullish in 3Q, under the range movement basically. I had concerned about intensifying inflationary pressure toward end of this year and this could push the market yield higher rapidly in line with Fed’s fund rate hike. The expectation of improving economic growth would be delayed, I thought, while it would robust at last. However, it will be likely more delayed rather than given expectation due to Chinese economic slowdown and lower wage growth in US than expectations. I trusted Chinese economy should turn to improve in 2H this year because recent import data, which is calculated by own using main Chinese trade partners including US, EZ, Japan, Korea and Taiwan, had shown the signal of being at the trough and recent upward pressure of BDI and upturn of Chinese residential market mean the possible economic fundamental improvement, I believe. Optimists about Chinese economy argued May’s exports data from Taiwan recorded high since end of last year and this could signal Chinese trade volume or global volume started to be turned to upside. This was in line with my argument. However, June data declined again back to its low level in Taiwan and Chinese HSBC manufacturing PMI indicated downward pressure in economy further. Under the downside risk in Asian economy including China, and subdued inflationary pressure under low commodities price and moderate wage growth in US, US Fed doesn’t seem to be hawkish from now on. So, the opportunity for capital gain in US bond market would be in long-end tenor. It would be somewhat efficient strategy in the environment that Fed increase rate in September, because long-end rate could maintain current level despite policy rate hike, under the woes about long-term growth and inflation.

I focused on ECI rather than hourly average wage, because the main rationale that wage growth pressure is lower against payroll data was proposed that the weight of low wage job have been increased relatively. Someone who is dovish argue this as the structural problem in labor market and secular downward pressure in wage, but another one who is dovish argue that the wage should increase rapidly at most and the ECI, which is consist of fixed weight of industries and jobs, showed rapid robust in 1Q, +2.6% on yearly base, and this meant the likely the possibility of increase of wage soon. That was ECI, but this ECI was very, very disappointed in 2Q, it was only 2% growth. Someone criticizes ECI as one of vulnerable data to interpret because the sample numbers is very small, and this low level was influenced by specific, sales job’s wage and the change of definition about retirement costs. But, including these perspectives, ECI was very low, apparently.

On the other hand, the commodities price would continue to face headwind due to a lack of demand led by Chinese economic slowdown and supply pressure from OPEC and US oil firms. Oil price had increased in 1H this year in line with the decline of US oil supply mainly, but investors were very disappointed to EIA’s report because they revised up the amount of supply from January to June this year. The faith on supply data in US diminished because of this upward revise. The oil price would continue to be pushed toward downside for longer time. This factor would make the inflationary environment more moderate, especially in 3Q and early 4Q this year.