USD/CNY: Temporary strength - MUFG

Cliff Tan, Research Analyst at MUFG, explains that after a few weeks of fixating on 2s/10s flattening in Treasuries, we’ve now caught a bit of Big Dollar Capitulation in response to Yellen’s parting dovishness (which should logically also imply re-steepening).

Key Quotes

“If the Fed slows tightening due to noflation (something we have asserted since a 2015 speech), the contrast of Chinese managers tightening via new regulations on wealth management products contributes to CNY/CNH strength. Refi pressures we have discussed all year and especially in the past three monthlies continue to push up yields. That has and will lead to more defaults. As defaults grow, the next danger is an unwind of leveraged asset management positions, re which officials have no good information.”

“Credit fails should also lead to equity downturns, which since China now looms large in the global imagination is not good for all equity markets. Above all, higher rates will slow Chinese growth. We think higher rates are probably intended to try to slow the growth of shadow banking, particularly in the interbank market. But will authorities allow companies to fail as part of that effort? We are doubtful, given the income doubling goal.”