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BK: Yuan-na Bet?

By - - Market Sentiment on May 9, 2017 10:40 AM Follow-Ups index
Last night on the big show called Fast Money – Jeff Gundlach announced his best idea for 2017. He recommended a pairs trade, long the emerging markets via EEM and short the S&P 500 (SPY).  The short side of this trade was more about a hedge than an directional call on the US stock market.  My comment on the long EEM trade was that this is making a bet that China will be successful at popping a massive credit bubble.  BK has his doubts, but its not BK’s job to impose his opinion upon the markets, it’s BK’s job to let the market decide for itself.
To that end, the long EEM trade will be highly sensitive to movements in the US dollar and in particular in the US Dollar/ Yuan exchange rate.  It’s not so much the actual value of the exchange rate, but the directional movement.  This rate is closely watched and any break higher will be viewed as the first sign of trouble in China.
This is why BK is so fascinated with the trading pattern that has formed in both the Onshore USDCNY rate (which is government controlled) and the offshore rate USDCNH (which is supposedly “free floating”).
Onshore Chart here:
screen-shot-2017-05-09-at-8-25-46-am
Offshore Chart here:
screen-shot-2017-05-09-at-8-26-27-am
As you can see from the charts, both of these rates have reached a resistance point that has held for all of 2017.  If this level is broken then BK suspects it will set off alarm bells not just with investors but also with the Tweeter in Chief.
Since any upward break will be a deliberate act by the Chinese government to weaken its currency, BK is reluctant to make a prediction.  Nonetheless, BK will be hyper sensitive to moves in the currency.

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