Tuesday, 11 August 2015

Some macro thoughts today

Some macro thoughts today...

Foreign exchange/the yuan - PBOC Fixes Yuan Reference Rate At 6.2298 (prev 6.1162) biggest one-day loss (c. -1.9%) since China unified official and market exchange rates in January 1994 as this chart from Fast FT shows: 

In official Q&A the Chinese central bank notes: 

‘This complex situation is posing new challenges. As China is maintaining a relatively large trade surplus, RMB’s real effective exchange rate is relatively strong, which is not entirely consistent with market expectation. Therefore, it is a good time to improve quotation of the RMB central parity to make it more consistent with the needs of market development…the reform of RMB exchange rate formation mechanism will continued to be pushed forward with a market orientation’. 

For me this is reflecting the impact of the general strength of the US dollar which has meant China’s real effective exchange rate is up 14% yoy.  Not quite another leg in currency wars but shows the tensions in the world due to the strong US dollar (as I discussed at length in Friday's Financial Orbit Speaks - link here). Shows how important ongoing economic reform is for China…and Europe (who cannot rely on a weak euro forever).

Greece - Greece & Lenders Agree Primary Surplus/GDP Targets as per Reuters. 2015: -0.25%, 2016: 0.50%, 2017: 1.75%, 2018: 3.50%. Talk of deal being close to completion although ‘details’ still to be worked out.  They need to be with this level of debt as noted below.  Still believe the only sustainable deal is one that includes an overt debt restructuring...

Europe ‘Germany gained Euro100bn from the Greek crisis’ - the sum represents money Germany saved through lower interest payments on funds the government borrowed amid investor “flights to safety…These savings exceed the costs of the crisis — even if Greece were to default on its entire debt,” said the private, non-profit Leibniz Institute of Economic Research in this paper.

Slightly inflammatory showing any deal with Greece is not going to be uncontroversial...

China – aggregate financing (the broadest measure of Chinese credit available) -61% month-on-month despite strong new yuan loans and M2 money supply = shadow banking contraction…and that is probably all related to the impact of the stock market crash. Meanwhile Singapore's Ministry of Trade and Industry downgraded its growth forecast for 2015 to between 2 per cent and 2.5 per cent from 2 per cent to 4 per cent previously blaming China…and general global conditions.

So the looser policy via the yuan well-received at the margin.  Note the impact of the stock market volatility too.  Meanwhile showing the importance of ongoing structural reform in China, from next year onwards the labour markets are not going to be so easy...

Finally...perhaps we should have a more fundamental concern...about sea levels

(h/t @ldaalder) 

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