VP’s China leading indicator has shown few signs of rebounding and remains in negative territory, presenting a persistent headwind to the RMB. Historically a negative China LEI has led capital outflow by about 6 months and points to further outflow pressures (top-left chart). When we break down the Chinese FX reserves data and strip out valuation effects, we can see that outflow pressures have been maintained for the past 6 months (top-right chart), with December continuing to see meaningful outflows. This will continue to weigh on the RMB and suggests the current sell-off in the USDCNH is not justified by the underlying macro.

One reason for the current dip in USDCNH is the re-pricing of the Fed, where almost all hikes have been taken out by the market. The bottom-left chart shows that the dramatic flattening and inversion in the Eurodollar curve has coincided with a weaker USDCNH. However, we are nearing the limits of how much further the curve can invert in the absence of the Fed cutting rates, and risk-reward heavily favours betting on a more hawkish Fed given that hikes are currently not priced in for 2019. The YTD fall in USDCNH is also looking a little stretched based on the deviation from the 50-day moving average. The last chart shows that the deviation normalised in terms of Average True Ranges (ATRs) has reached levels where previous bounces have occurred.

 

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception