Mikkel Rosenvold
3 weeks ago

Andreas Steno: Why China will devaluate and how to trade it

Andreas Steno outlines five compelling reasons why a significant devaluation of the Chinese Yuan (CNY) is expected next week and how markets might respond.
ibphoto / DepositPhotos
ibphoto / DepositPhotos

In his latest editorial for Steno Research, Andreas Steno delves into the imminent risks and trading strategies associated with a potential devaluation of the Chinese Yuan (CNY). Steno begins by noting the consensus among Portfolio Managers in Asia that a devaluation is on the horizon, driven by various macroeconomic factors.

  1. Strong Yuan Against Peers: Steno explains that despite appearing weak against the USD, the Yuan is considerably stronger compared to a basket of other currencies, which has implications for China's export competitiveness. This strength makes a case for devaluation to align more closely with actual market conditions without causing international backlash over currency manipulation.

  2. Preemptive Commodity Stockpiling: China has strategically increased its reserves of crucial commodities like copper and oil, which Steno interprets as a preparatory move ahead of a devaluation. This allows China to capitalize on stronger purchasing power before the Yuan is adjusted.

  3. Gold Reserves as a Buffer: The shift in China's reserves from U.S. Treasuries to gold is seen as a tactic to manage the devaluation's pace without destabilizing the broader financial markets. This could prevent impacts on U.S. interest rates, which would exacerbate global financial volatility.

  4. Diversification of Import Sources: Steno highlights China's recent shift in agricultural imports from the U.S. to Brazil, which not only diversifies its supply chains but also prepares for potential geopolitical friction with the U.S. following a devaluation.

  5. Historical and Current Market Indicators: The analyst draws parallels with the market conditions of 2014/2015 prior to the last significant Yuan devaluation. Recent price actions and the easing of liquidity pressures in Hong Kong suggest that conditions are ripe for another adjustment.

Steno concludes by discussing potential market reactions. He anticipates negative impacts on U.S. equities, particularly fixed-income proxies like real estate and utilities, while suggesting that energy stocks may benefit. In the FX space, he advises positions that anticipate a weaker Yuan, such as being long on MXNBRL and short on EURUSD.

The analysis wraps up with a look at the broader implications for global trade and inflation, suggesting that a devaluation could further entrench de-globalization trends and affect global economic dynamics significantly.

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