As euphoria and complacency spreads across invest-landia there is one corner of the world that may not be doing so well. China has been making concerted effort to reign in its self-inflicted credit bubble. In the last few trading sessions we have seen the economic slowdown in China manifest itself in weaker commodity prices and weaker commodity currencies, especially the Aussie Dollar. Adding to the concerns of a slowdown was a weak Caixin PMI that fell from 52.1 to 51.2 and was below expectations. When viewed alone this decline in PMI does not appear to be a warning sign to investors. However, if the trend in loan growth continues to fall (as expected) then it’s quite possible to see the PMI drop below 50, or contraction territory.
What’s fascinating (at least to a currency nerd like BK) is that the economic indicators have turned lower at the same time the Chinese currency is approaching a decision point. For all of 2017, the Yuan has traded in a tight range, coiling like a snake waiting for its next attack.
Given the widely held assumption that the Chinese government keeps a tight control on the release of economic data AND that it controls the price of the currency, it’s reasonable to expect continued economic weakness to show up in the Yuan before it shows up in the official data. Therefore, BK expects to see the Yuan move lower before the economic data turns lower. It’s decision time for the currency and it does not appear to BK that anyone is paying attention.