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“It’s not what you look at that matters, it’s what you see.”

                  Henry David Thoreau

Commentary & Analysis
China warns hot money – Japan reverses energy policy – A monkey wrench for the yen one-way bet?

Chinese leaders’ know well the danger of a hard landing via the transmission of cascading defaults on rising debt across companies in key industries. And they also understand the solution to this problem requires a delicate balancing act—they must deal with hot money and the Fed taper all the while their economy’s growth is decelerating in the face of reform.

China recently adjusted the unknown basket against to which their currency “floats” in order to show hot money players that one-way bets can be risky:

In addition to the hot money problem, a weakening of the yuan also helps another problem nagging China—the massive depreciation of the Japanese yen adding unwanted competitive pressure on Chinese exporters:

But the other side of this balancing act is that “taper thing.” It is still unknown just how much liquidity might drain from China on Fed tapering and corresponding slowdown in growth. Officially, China seems confident, but guarded, inward investment flows will remain strong in 2014:

BEIJING, Feb 25 (Reuters) – China is likely to see relatively big net capital inflows this year, though the U.S. Federal Reserve’s tapering of its stimulus programme could help ease some pressures, the country’s foreign exchange regulator said on Tuesday.

“…Especially when the QE tapering gradually takes effect, the pace of increases in the funds outstanding for foreign exchange may ease or even drop,” SAFE said on its annual capital flow oversight report, referring to the Fed’s quantitative easing programme involving massive bond purchases.”

The second paragraph above seems to hint the yuan may be on a weakening path and the recent weakening is more than a one-off to scare away some hot money.

What might be some trade ideas to glean from this information, adding one more tid bit–the Japanese government has reversed themselves on the nuclear policy.

  1. Long USD/CNY [weakening yuan]
  2. Commodities basket continues under pressure
  3. Oil seems especially exposed given the fact, i.e. future expected oil demand from Japan will require a re-write now on their move back to nuclear.
  4. A shift back to nuclear will likely help the current account deficit in Japan, which means fewer yen sent out into the world. This may throw a monkey wrench into the yen weakens “forever” theory.