$/CNH moves accelerating. Need to cut reflation bets

Historical muscle memory here has seen big moves in $/cnh before and this has me concerned about pace of cyclical growth/reflation. We are hedging our reflation bets.

I have been discussing this strength in $/CNH on my Twitter feed (@ces921) over the last few days but I wanted to break in today with a quick update that I have been reducing my net long exposures in reflation trades over the last 48 hours on the back of this continuation in the strength of the US$ vs CNH.

Source: Bloomberg Data

I have also noticed the long-term outperformance of CNH vs JPY and think that levels on this cross have hit an extreme that China is likely to push back against given their competitive role against Japan in the global export markets.

CNH has been amongst the best-performing currencies in the world since Covid began but as China has re-entered lockdowns and the Fed has begun its tightening cycle, the reasons for owning CNH (yield differentials, better control over inflation, etc.) have started to dissipate. We see slowing growth in China that eventually will need to be addressed by the PBOC but for now, with Covid still an issue and the supply chain struggling, we think there is potential here for an air pocket in reflationary assets as long CNH positions will be unwound and follow-through will be likely felt in other asset classes as well (think BRL/AUD/iron ore/miners). Note below the pickup in ships waiting to load or discharge at Shanghai currently. This remains a big problem.

Historically, periods of CNH devaluations vs US$ have led to short-term deflationary bust type periods (think August 2015) given China’s outsized role as the global incremental demand driver of nearly all commodities. When China slows and the CNH weakens, historically, commodities struggle as they are priced in US$. When positioning is as net long reflation bets right now, the chances of an unwind are even greater. We have been discussing China’s ability to price commodities in RMB and think this is a very important long-term secular driver that will assist them but on a short-term basis, the speed of the $/CNH move has us concerned and we need to reduce our exposures. We are still structurally in the inflationary camp but in the near term here, we are hedging.

• We are added sizing to our EEM/FXI/EWZ puts

• We have entered shorts in big-cap miners (RIO/BHP/VALE) which are most exposed to specific pressures that would emanate from China as they are heavily exposed to iron ore which is often viewed as a proxy for China’s industrial economic strength.

• We are keeping our FCX calls which are for May after another strong EPS print today but like having some direct mining shorts against this position to hedge the sector data.

• We remain long gold and gold miners

• No changes in other individual equity positions

*Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.