Macro FX Themes

Not a day goes by in these times when a new record is not made.

And today the honours go to CNY, setting a historic high against the USD on the PBOC fixing. USDCNY : 6.0854.

It has been a wild week in the markets but some trends are emerging.


That is de-americanisation for you and it would appear that the world is serious about that intention for all that the S&P can rally when we look at the TIC flows for August that were release last night.

The international capital flows point to a steady trend of investment outflow from America that started early this year in terms of foreign buying of US securities which is ebbing against a swell of US purchase of foreign securities.

China decreased their holdings of US treasuries yet again with the number shrinking to $1.27 trillion. Net buying of US securities have turned negative over the past 3 months and it is starting to look like the USD story has peaked.

Citi strategist pointed out that if flows are such when times are “good” then what happens when times are bad in the land of the free ?

My take is that these are not all the capital flows that we are seeing because the real estate is fast going, not to mention the other hard assets that the China are swiping up like water – the oil fields, farms and mines. The Smithsfield $4.7 billion deal makes up a decent chunk of inflows not accounted for  in the TIC data.

Commodity In Favour

The commodity theme is back with the taper out of the way – Alcoa with a huge 12% spike yesterday to a new 1 year high on news of supply cuts and China’s aluminium usage at highest ever.

The rotation into base commodities could be just beginning and the currencies are front running – AUD, BRL, ZAR and CLP but the feeling is that the moves are quite overdone.

If the base materials move is due to expectations of China, then next month’s 3rd plenum of the CCP congress will surely be a risk event especially with rumours of massive reforms lined up, starting with the rumour that surfaced today on property curb measures to be announced.

Discerning Markets

The broad base relief rally post em crisis and post shutdown has not been that broad based.

CHF, AUD, EUR and GBP have been the main beneficiaries whilst the smaller currencies in the SEK, NZD, CAD and NOK have underperformed.

Even amongst the EM currencies, the Asian currencies are overwhelmingly favoured over most of the Latam particularly those without the domestic fiscal issues. The 2 year high in the Sensex feels rather unnatural if you ask me with their elections coming up next year.

It is starting to look like blanket bombing ETFs will not be working so well in the future and investors will be hounded by the bankers to leave decisions to the hands of the pros.

Central Bank Nightmare on Inflation and Real Estate

We had Germany’s Bundesbank acknowledging housing prices are over valued yet inflation is falling.

The Nordic central banks, too, are caught in a quagmire, grappling with inflation way below target and property markets that are running away on cheap funding.

Globalisation is the main culprit as capital flows freely between borders which are no bother these days.

As the central bankers wrestle with the dilemma to hike rates and force banks to boost capital (which will hopefully translate to higher borrowing costs), the risk is in sparking off a deflationary spiral for themselves.

Central banks will be pushed into action soon. The FOMC is on 29-30th Oct and if the result is a dovish outlook, individual central banks will have to take action on their home fronts.

From the investor viewpoint, the uncertainty will be painful. Market frustrations with new rulings that will sprout overnight will lead to volatility and a reluctance to commit. Central banks, like the Bank of Canada today, will be hard pressed to decide between falling consumption and exports stacked against potential asset bubbles in real estate and equities.

The markets have gone for a long time without thinking much in their risk on and risk off modes, the basket of currencies and assets neatly segregated for the trades. It is human to simplify for our minds cannot cope with fluctuating variables and parameters that come with major inflection points and experience tells us that information and policy overload just leads to burnout, to throw in the towel and to start afresh.