China: The Case For Yuan Depreciation; + A Political Shift In Argentina

Among Asian currencies, one market that has yet to move lower is that of the Chinese yuan. We recently sketched out our view of yuan weakness over the coming years (see Business Monitor Online, May 20 2013, ‘CNY: Fundamentals No Longer Supportive’), a call that is based on relatively steep valuations and a worsening fundamental backdrop. Currency weakness in China’s key trading partners (not least the Japanese yen) has seen China’s real effective exchange rate soar to multi-decade highs. This will put the squeeze on exporters at a time when the global demand picture is far from benign. Indeed, the latest flash HSBC purchasing managers’ index has fallen back into contractionary territory (at 49.6 in May), led by a fall in new orders. Therefore, the stage seems set for a CNY reversal in the coming months.

With this in mind, we have decided to introduce a bearish view on the 12-month CNY non-deliverable forward outright in our regional asset class strategy, as expectations of depreciation start to gain traction. Currently at CNY6.2270/US$, we are targeting a medium-term move back to CNY6.5000/US$.

A Political Shift In Argentina?

Elsewhere, we continue to believe that 2013 will be a turning point in Argentine politics, signaling the beginning of a shift away from the unpredictable and highly interventionist style of government practiced first by the late President Nestor Kirchner and now by his wife and successor, President Cristina Fernández de Kirchner. As a sputtering economy increasingly discredits the ‘Kirchnerite’ governing model, we believe the balance of power will shift towards more moderate members of the Peronist coalition. A key test will be this October’s mid-term elections. However, we acknowledge a number of risks to our outlook, not least of which is that Fernández is an adept politician and has managed to reverse public opinion in the past, a scenario that could ensure that interventionist policies remain the norm over the next several years. More detailed analysis is available to subscribers in our online service.

This Week’s Trivia Question

Last week’s question concerned the Philippines, which held mid-term elections earlier that week, has the second-best performing stock market in Asia this year, and has received investment grade status from credit ratings agencies. Our question was, which 1950s science fiction novel, made into a Hollywood blockbuster in the late 1990s, featured a Filipino protagonist? (Hint: in the film the hero was played by a fair-haired Caucasian actor. In both the book and the film, Buenos Aires is destroyed.) And, since the new Star Trek film was released recently, which major character was named after a body of water in the Philippines?

The answer to the first part is Robert Heinlein’s Starship Troopers. The novel is told by a first-person narrator, Juan Rico, and the reader only discovers that the protagonist is Filipino when he mentions to a colleague, towards the end, that his native language is Tagalog. The answer to the second part is Sulu, who was named after the Sulu Sea in the Philippines.

This week’s question is as follows: which 1980s American soap opera had a season cliffhanger in which all the characters appeared to perish in the massacre of the royal family of a quasi-fictional European country, and what was that country? (Incidentally BMI‘s Senior Economist is currently visiting the country in question, and I hope he writes a blog-post about it when he gets back.) And what is the connection between this fictional ‘massacre’ and the former Serbian royal family, and, surprisingly, the film version of Starship Troopers?