Currencies

China removed checks and balances in its political system to deal with a very dangerous economic transition. The transition is going badly, yet investors cannot rely on checks and balances to correct or prevent policy mistakes. The Taiwanese election is a looming bellwether.

In this report, we review our FX trade recommendations with suggestions on how to position for the next few months.

Deflation prevails in China’s economy. Marginal interest rate cuts will be insufficient to boost growth as the economy is experiencing debt deflation and might be entering a liquidity trap. There will likely be more economic disappointments in the coming months. Chinese stocks will continue to sell off. Government bond yields will fall to new lows, and the RMB will depreciate further against the US dollar.

In this special report, we discuss whether the economic conditions necessary for a stronger yen (and higher JGB yields) will materialize over the next 12-to-18 months.

Commentators often use notions like debt deflation, balance sheet recession, and liquidity trap interchangeably. Yet, these are different concepts. This report develops a framework and provides a diagnosis of China’s economic malaise. A follow-up report will deal with what kind of treatment is needed for a recovery. As a trade, we recommend shorting the EM equity index.

In this special report, we discuss whether the economic conditions necessary for a stronger yen (and higher JGB yields) will materialize over the next 12-to-18 months.