SHCOMP & CNY: 1993-1994 = 2015-2016?
Much has been made about China’s need to devalue its currency vs. USD over the past year since the country abruptly nudged it immaterially lower in Aug-15.
I honestly have no strong opinion or edge re: likelihood that this does or doesn’t happen or, if it does, at what pace and how acutely it might occur.
However, per the usual, I do think if one has a strong enough fundamental conviction in the inevitability of such a deval, they can lean on historical parallels to frame up an expected window in which the event might catalyze.
In that regard, in the chart below I plot the path the SHCOMP took off its major Feb-93 high (dotted black) and compare it to the path that USDCNY (dotted red) tracked over that same period. I then overlay the paths of the same two assets, this time in in solid red and black, since the SHCOMP peaked in Jun-15.
Strikingly, the path the SHCOMP has taken off its Jun-15 high is nearly identical to the path it took off the major Feb-93 high that ultimately led the Chinese to deval CNY 50% against the USD, roughly in this time frame (i.e., the deval in 1994 came ~235 days after the SHCOMP peakin Feb-93 vs. the current day count of ~255 off the Jun-15 high).
Here’s the same analog on a chart to put the relative begin and ends of the moves into perspective:
These comparisons will never be identical, but I found this so fascinating that I felt compelled to post.
The question is: does the 1993-1994 parallel offer a window into the likely timing of a 2016 deval, potentially one in the near-term?
Certainly a 50% deval is unrealistic if not completely unneeded, but could a move to $7.00-$7.25 prove feasible given this would represent a ~15%-20% round-trip off last year’s highs for CNY and is where most of the chart-based resistance calls for the next stop?
And, though my initial thoughts on any CNY deval were largely predicated on the idea (which, admittedly, was intellectual laziness and buy-in to the emphatic consensus that remains to this day) that it would be highly deflationary and financial-stress inducing on a global basis, these thoughts have both evolved and changed over time.
Though there is surely more work to do on the topic, does such an event have the potential to actually be inflationary to the globe over the intermediate to long-term? We need to think how the RoW would react to a China deval and contexualize with the political cross-currents we see in the world today.
My thought here is that the RoW would react with a bevy of incremental price controls and tariffs to protect domestic economies.
If elected on the heels of a China deval, would Trump not make haste with the implementation of these items almost immediately?
In this case, these items tend to create the conditions necessary for inflation in the intermediate-term, despite some suggesting they will create a deflationary global depression. Anyone who doubts this needs to refer to the presidential history of Richard Nixon who attempted just this in the 70s.
And, while inflation is certainly bad for risk assets in most situations, for a world that can barely generate any nominal GDP growth whatsoever and $11+ trillion in sovereign debt in negative-yield territory, any tick up in inflation, at least on the front end, will actually be quite positive for global growth, so long as P in P*Q rises and Q stays constant.