Great thought piece, Russell. There is indeed a conundrum.
CNY is strengthening big way against KRW and JPY almost last two years (since covid?) while it is still being a major exporter to both of them. It is basically exporting inflation to them, given what it exports, from what I tell, are relatively important electronics components and parts, (intermediate goods?) for their respective economies.
Meanwhile, CNY started to weaken against USD, which is deflationary across the commodities/industrials segment (think about cheap CNY costs in them. Remember, despite Chinese major imports of commodities, it is still a very major producer itself, too, even in coal, iron, aluminum etc.). This is certainly bad for commodity exporting EM and industrials exporting Europe. It may actualy be welcome by US and some parts of the world, given the inflation fight.
I am tempted to say that it seems like culprits are Japanese and Koreans, preemptively devaluing their own currencies against everyone... But then again, I see similar moves in other EM countries, too. USD stretghening against all, including CNY whie CNY has not reacted until very recently.
Dollar weakness is historically bad for commodities, but AUD/JPY strength has been good for commodities. Which is the correct one to look at? Given the US is a net energy exporter, perhaps we should ignore historic relationships for the USD?
Yes historically speaking dollar weakness was good for commodities. But in recent years the US has become a net exporter of energy commodities - so perhaps that relationship is no longer true.
If you look at the Australian dollar v the Japanese Yen, you have a commodity exporter v a commodity importer (Japan) - and the relative exchanges rates of Australia and Japan have moved in line with the change in commodity prices.
Yeah that makes sense thanks... However the Chinese consumer doesn't seem in great shape so even if travel restrictions are lifted in both countries, I think the "normalisation" of tourist flows might be very gradual, wouldn't you agree? In any case that's a very good point that I hadn't thought of and seen anywhere, so as usual it is tought-provoking and very useful.
Russell, long story short
Is the new widowmaker trying to short the Yuan instead?
Great thought piece, Russell. There is indeed a conundrum.
CNY is strengthening big way against KRW and JPY almost last two years (since covid?) while it is still being a major exporter to both of them. It is basically exporting inflation to them, given what it exports, from what I tell, are relatively important electronics components and parts, (intermediate goods?) for their respective economies.
Meanwhile, CNY started to weaken against USD, which is deflationary across the commodities/industrials segment (think about cheap CNY costs in them. Remember, despite Chinese major imports of commodities, it is still a very major producer itself, too, even in coal, iron, aluminum etc.). This is certainly bad for commodity exporting EM and industrials exporting Europe. It may actualy be welcome by US and some parts of the world, given the inflation fight.
I am tempted to say that it seems like culprits are Japanese and Koreans, preemptively devaluing their own currencies against everyone... But then again, I see similar moves in other EM countries, too. USD stretghening against all, including CNY whie CNY has not reacted until very recently.
Dollar weakness is historically bad for commodities, but AUD/JPY strength has been good for commodities. Which is the correct one to look at? Given the US is a net energy exporter, perhaps we should ignore historic relationships for the USD?
Thanks Russell, this is a great piece. Just a bit confused here, isn't that dollar weakness is usually good for commodities?
Yes historically speaking dollar weakness was good for commodities. But in recent years the US has become a net exporter of energy commodities - so perhaps that relationship is no longer true.
If you look at the Australian dollar v the Japanese Yen, you have a commodity exporter v a commodity importer (Japan) - and the relative exchanges rates of Australia and Japan have moved in line with the change in commodity prices.
Russell the AUD has strengthened against the JPY but not USD. The Aussie has ben badly lagging the spike in commodity prices since 2020.
https://www.bbc.co.uk/news/business-62873518
So you think that might be enough to reverse the yen weakness, if confirmed?
I reckon you need to see china lift restrictions to see a big change....
Yeah that makes sense thanks... However the Chinese consumer doesn't seem in great shape so even if travel restrictions are lifted in both countries, I think the "normalisation" of tourist flows might be very gradual, wouldn't you agree? In any case that's a very good point that I hadn't thought of and seen anywhere, so as usual it is tought-provoking and very useful.
Russell my understanding is that there have been(and still are to some extent) travel restrictions into Japan for tourists?
Yes correct - hence markets (or in this case tourists) are physically constrained to buy Yen
Here in Australia people are waiting for the restrictions to be lifted so we can go to Japan as AUD has appreciated a lot
Its a no brainer - especially if you like quality food