Yuan Weakness In Context
We continue to hold a bearish view on the Chinese yuan, yet are generally positive on most other FX markets across the region. We continue to hold a bullish view on the Indonesian rupee via our local currency bond view (which is up 13.0% in total return terms so far), and believe that the lows seen in the Deutsche Bank Asian Currency Index back in August 2013 may prove to be the low point for the cycle, particularly in carry-adjusted terms. We remain bearish towards the New Zealand dollar, on the other hand, which we believe is pricing in far too hawkish a monetary tightening cycle.
Our bearish 12-month yuan NDF view is up 2.3% at present in our asset class strategy table, having hit a new low in today's trading. This weakness is particularly noteworthy as it has come at a time when we have seen broad based strength across other emerging market currencies. Indeed, since we turned bearish on the unit in our asset class strategy on January 27, it has been the worst performing currency in the world in total return terms according to data compiled by Bloomberg.
Rather than a temporary blip in the longer-term uptrend, as most observers expect, we believe that this weakness marks a major turning point in the yuan's performance, and we continue to forecast broad-based underperformance. The release of China's credit figures for March highlights the predicament that Chinese policymakers are in. While new total social financing rose strongly, the growth in the overall stock slowed further owing to the huge base of existing credit. As slowing money supply growth continues to weigh on economic growth, the yuan may begin to price in the negative impact of extraordinary monetary measures by the People's Bank of China in order to ward off deflation.
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