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Chart of the Day: China CN50

I looked at USDCNH as the Chart of the Day on Friday. While I felt we’d see higher volatility on a break of the seven-handle, I’ve been surprised by the moves not just in USDCNH but through broader markets.

Chart of the Day - Aug 6, 2019 - CN50, daily

The China CN50, which consists of the top 50 mainland-Chinese companies traded as a futures index on the Singapore futures exchange, is another vehicle to express a view on US-China trade tensions. If the perception is the yuan will further weaken, traders increase fears of a capital flight, which acts as a quasi-tightening of financial conditions and a headwind on Chinese economics. Of course, equities will find sellers easy to come by in this environment.

Momentum clearly favours being short the CN50 index here for a move into key horizontal support. The fact, then, that we’ve seen the US Treasury label the Chinese a currency manipulator this morning will only exasperate the issue. China will aggressively deny this is the case. It’ll ramp calls for the US to intervene in the FX markets, selling USDs, but it’ll weigh on Chinese equities as it’s a political statement.

The risk to being short here is that Beijing, recognising the feedback loop of weaker asset prices into economics, instructs the state-owned banks to buy stocks and offer a more upbeat narrative. But for now, the trend is lower, and it seems this is going to get worse before it gets better.

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