Money Trends / Liquidity

This week’s report looks at the banking crisis within the context of shrinking dollar liquidity and implication for FX markets.

Depending on market volatility during the next few trading days, the Fed will either lift rates by 25 bps next week or pause its tightening cycle. Either way, the Fed’s hiking cycle is close to its peak but rate cuts won’t be coming anytime soon.

The first legislative meeting of Xi Jinping’s third term suggests that Chinese policy is continuous and consistent with the previous ten years, which is negative for long-term productivity.

Great Power Rivalry is taking another leg up as Russia and China further align their geopolitical interests. Investors should stay long USD-CNY, favor defensives over cyclicals, and markets like North America and DM Europe that have less exposure to geopolitical risk. 

Thai stocks and currency will weaken over the short term. And yet EM equity portfolios should overweight Thailand as tourism revivals will rejuvenate this economy.

We discuss the outlook for the Fed’s balance sheet and why QT is likely to continue for at least another year.

Two developments this week reinforce our key views for 2023. First, Russia’s threat to reduce oil production by 500,000 barrels per day, while escalating the war in Ukraine, confirms that geopolitical risk will rebound and new oil supply shocks are likely. Second, China’s credit numbers for January confirm that the country is trying to stabilize the economy but also that stabilization will not come quickly. Moreover, stimulus does not resolve structural problems over the long run. We remain defensively positioned overall and underweight Chinese assets.

Highlights Market expectations for Fed rate cuts later this year reflect either an extremely mild US recession, or a nonrecessionary scenario in which inflation falls rapidly back toward the Fed’s target. In the case of a true recession, even a historically mild one, the Fed will likely cut…

Global investors should sell Chinese assets on strength this year and diversify into other emerging markets. American investors should limit China exposure. Short CNY-USD.

China’s infrastructure investment growth rate will likely slow from its current nominal 14% to 4-6% in 2023H1, on a year-over-year basis. Funding constraints and a shrinking pool of good projects will cap the upside in China’s overall infrastructure fixed-asset investment (FAI) in the next six months.