We have been bullish of USD/CNH in recent articles and we have seen some decent upside and there is far more to come in our view. Also, a stronger USD on the CNH will weigh on all correlated Yaun currencies the AUD, NZD, SGD, and ZAR.
The market remains generally optimistic about a recovery in the Chinese economy but not only is it slowing up quickly this slow-up will accelerate – the Chinese economy is already facing deflation and we expect a recession.
The rapidly fading short-term drivers of reopening and restocking laid bare China’s underlying structural growth challenge: exports and property, the two main engines of China’s growth over the past few decades, are sputtering. Exports are challenged by mediocre global growth (~2% ex-China), China’s already-large market presence, geopolitical tensions (in particular, ongoing US tariffs and export controls), and the shift in focus of multinationals from ‘lower cost’ to ‘greater resilience’."(GOLDMAN SACHS)
In terms of growth going forward here are some forecaster's views – the majority view from Bloomberg is clearly wrong against the facts and is based on hope rather than reality and we think the GS view is likely to unfold.
China is already in Deflation
Exports have plunged and internal demand is weak which we can see in the collapse in terms of both CPI and PPI.
PMIs and Leading indicators have turned down the Economy is Heading for a Recession
Leading indicators are all flashing warnings of a recession in the coming months and a fall in GDP.
We are already seeing deflationary forces in the Chinese economy which point to a recession and all leading indicators are flashing warns of a recession also business confidence is collpasing and unemployment is rising especially amongst the younger population.
Real Estate Market Slowing and a Potential Crash
This market is huge in terms of size and impact on the Chinese economy around 70% of household wealth in China is stored in real estate its worth around $60 Trillion which is around 30% of China's GDP! The problem is after years of excess the property market which created a bubble its now collapsing and it will take China’s GDP down with it. From investment to sales the property market is seeing a big slowdown.
China Stimulus to Help the Economy
Many forecasters expect the Chinese authorities to try and stimulate demand but this is unlikely with high debt levels. "Markets and businesses should get used to the 'new normal' in which the Chinese government will avoid rolling out big stimulus," (Tommy Wu, senior economist at Commerzbank.) China's slow-up is a big fundamental - a slowing China is bad news for the commodity currencies and also will impact risk sentiment and we believe it could create a sell-off in stocks which is bullish the USD on its safe haven status.
Devaluation of the Yuan?
We have low internal demand and contracting exports what can the Chinese do to reverse the decline – they have already said there is no quick fix but one option is to let the Yuan fall to boost exports which we think they will do and let the Yuan fall a long way. USD Longs also benefit from attractive carry interest and we view long USD/CNH as a really good risk to reward long trade.
The key levels of support and resistance to look out for in our view are on the chart below.