We are heavily bullish of the USD and expect far more upside – we have a good yield advantage in favor of the USD and plenty of upside potential which would be boosted by a devaluation which we think is a strong possibility.
Interest Rates
We have a wide yield gap with the US having a significant advantage in terms of interest rate earnings.
The Economy
"The Caixin China General Manufacturing PMI edged down to 50.5 in December 2024 from November's 5-month high of 51.5, missing market estimates of 51.7 while marking the third straight month of growth in factory activity. Both output and new orders expanded at slower rates while foreign orders shrank after increasing at the fastest pace for seven months in the prior month." (TRADING ECONOMICS)
The economy is struggling to expand which we can see on the chart below.
Housing Property
The China housing market is the biggest investment sector in the world and after of decades of excess its struggling to recover which we can see on the chart below
Consumption
"Lately, that low consumption has become a headwind to China’s growth because property investment, once a major component of demand, has collapsed. This isn’t just a problem for China; it’s a problem for the whole world. What Chinese companies can’t sell to Chinese consumers, they export. The result: an annual trade surplus in goods now of almost $900 billion, or 0.8% of global gross domestic product. That surplus effectively requires other countries to run trade deficits. Chart shows the China's consumption is lower than other countries (adjusted)." (WSJ)
If we look at inflation we can see it's weak and a long way from the Peoples Bank of China's target of 3% - deflation looms for the Chinese economy.
"China’s economy is slowing once again after a period of improvement. With the current policy trajectory, we see prolonged deflationary pressures, with adverse implications on the income growth of lower-income households, especially for the bottom 20%. This is prompting a renewed debate about what is needed from a policy perspective. The current status quo of stimulating the supply side by encouraging investment may seem to be helpful in defending the real GDP growth trend for now. But it comes with a cost of entrenching deflationary pressures, diminishing returns on new investment and rising debt to GDP ratios. More important, weaker nominal GDP could weigh on wage growth, especially for the bottom 20%, and could widen income inequality." (Morgan Stanley)
The “Wildcard” A Devaluation
How can China protect against the impact of potential tariffs they could simply devalue the Yuan and our guess it would be in excess of 20%.
China Equities
Confidence in China is low as equities fall back.
Technical Analysis
We see plenty of upside potential in USD/CNH and you can see on the charts below the key levels of support and resistance to look out for in terms of getting long the USD.