Two charts in a research note from JP Morgan’s Global FX Strategy team show how the centre of influence of global finance has shifted toward Shanghai and Beijing in 2016.
They also highlight why today’s “Super Tuesday” data dump of GDP for the fourth quarter and retail sales, industrial production and urban investment are so important in setting the tone for traders and markets for the rest of the week.
The first chart shows the relationship between the weakness in the Yuan and the price of Brent Crude, the global oil benchmark. This appears to be especially strong since the market ructions of the third quarter of 2015 when concerns over Chinese growth knocked global markets.
Relationships are never perfectly linear and correlations tend to cycle. So the fact that China’s central bank has stabilised the Yuan in recent days, slowed its fall, and taken measures to make it more difficult for offshore traders to sell the currency, while crude has weakened further does not detract from the thesis.
Rather market expectations are for further weakness in the Yuan and JP Morgan has a target of 7.0 for later this year, from its current level of 6.5788.
The second chart showing the rise of China’s importance highlights global forex markets are now more highly correlated with the Yuan (they use the Chinese currencies other name, the renminbi) than with the US dollar.
This is not unprecedented. But as the chart shows it is certainly uncommon.
Ask any trader of the Australian dollar, and they’ll tell you China concerns are a big part of the recent fall. But in using actual market correlations the analysts at JP Morgan address any concerns about correlation and causality the statisticians might have.
Of course it’s not a hard case to make that China is now the primary focus of global markets in 2016. Traders know that the year, and the market rout, kicked off with weak China manufacturing and services PMIs and the related weakening in the value of the Chinese Yuan.
As a result each day markets in Asia go into a kind of twilight zone just before the Chinese central bank, the PBOC, sets the reference rate for the Yuan. Once the Yuan fix is out of the way the focus switches to the open of the Shanghai stock market a short time later.
These two events set the tone for the rest of the Asian day and a good part of the European trading session before US markets open fully.
But making and sustaining a case that the epicentre of global finance has shifted are two different things.
These charts go some way to proving the case. At least for now.