After The Election, This Is What The Market Will Obsess Over
This “year of fear” won’t end with the election, warns Bloomberg’s Mark Cudmore, the Chinese yuan will be the next focus for the panic mongers after the U.S. election. At least until they turn to the Italian referendum and the expected December Fed rate rise.
After several months of stability, the yuan is finally breaking down again versus the China Foreign Exchange Trade System basket.
This means that if the dollar jumps post-election, USD/CNY will smash through 6.80 and we could be challenging the post-financial crisis fixing level around 6.8270.
Since investors seem to be inordinately focused on USD/CNY, this will generate much excitement and prompt renewed fears about uncontrollable capital outflows from China.
Interestingly, this most recent leg of accelerated yuan weakness since mid-October has coincided with Chinese officials increasing property curbs. Perhaps this has intensified the motivation to get money out of the country. Hong Kong’s surprise move to increase stamp duty came amid renewed interest from mainland buyers that Bloomberg Intelligence said could herald further capital outflows.
However, any excessive panic will likely be unwarranted.
The PBOC may be letting the currency weaken again after a several months hiatus, but the pressures are significantly reduced since the January panic.
For a start, the yuan has already fallen about 7% this year. That’s contributed to the economy re-accelerating, which means hard-landing fears have receded.
The third-quarter current account surplus came in above estimates on Friday. The October trade surplus bounced (but disappointed).
Finally, something else that has been largely overlooked is that China recently relaxed the rules around foreign direct investment.
FDI has been subdued for years due to the bureaucracy and hurdles involved but, as of October 1, government approval is no longer needed if investing in a non-restricted industry.
So, while CNY is likely to become the focus of attention for doom-mongers after Wednesday, it’ll probably prove to be less of an issue than many fear. Just like all the other scares hyped already in 2016.