Having some technical issues so no newsletter tomorrow as we attempt to fix them.
Chart of the Day
China has been very slowly loosening monetary policy as its property sector suffers from a downturn, whereas the Fed has made a big hawkish shift in recent months, the net result of which has been a large shift in yield differentials between the two countries. Typically, we would think of such yield shifts as having an instant impact on the exchange rate between two countries, but as this chart shows, such yield shifts often precede a move in USDCNY exchange rate. That’s likely because the level of the CNY is as much a political one as one determined by markets, with the Chinese government having a large say in the level its sets the currency at. The problem is that it’s hard to take advantage of the leading nature of the relationship when it moves in this direction, because the higher level of interest rates in China means shorting the currency will result in negative carry for most investors.
Macro
The PBOC dropped the one-year lending rate by 10 bp to 3.7%.
Japan is going through a rare period in which imports are far outpacing exports, due to issues with car exports amid the semiconductor shortage.
US housing starts jumped to 1,702,000 annualized in December, while building permits increased to 1,873,000, suggesting more gains ahead.
Can it last though? Mortgage rates continue to climb, implying mortgage applications are unlikely to rise much.
UK inflation continues to rise.
Markets
The euro has came back down a bit, but not by as much as yield differentials imply.
Meanwhile, the NOK has been falling even as oil prices climb higher.
It’s generally been a good week for commodities, with the key exception of natural gas.
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