Albert Edwards has another warning for the financial markets — stop focusing on the pound, and look at China’s currency instead.
The notoriously bearish Societe Generale strategist, renowned for making big calls on the state of the world, used his latest Global Strategy Weekly note to discuss the recent crash in sterling,which has seen Britain’s currency plumb new lows on an almost daily basis. But Edwards argues in the note that the crash is not the most important thing happening in the forex markets right now.
In the note, sub-titled “Poundemonium diverts attention from the more important renminbi devaluation” Edwards says (emphasis ours):
“We warned in June that “sterling will fall with or without Brexit — but the renminbi decline matters more” and so it does. The Chinese have accelerated the renminbi devaluation, taking it to six-year lows versus the US dollar. This is the key global story to focus on, not the pound.”
Edwards’ basic argument is that while everybody in the Western hemisphere clamours to talk about the pound’s crash and its impact on Britain’s economy, something more troubling is going on in the Far East. Investors, Edwards says, are substantially underestimating the importance of the continuing fall in the yuan (also known as the renminbi).
China stunned global markets by devaluing its currency last year and recently weakened it even further. The move initially drew criticism around the world, particularly from the US. The US argued that China’s devaluation was simply a play to give the country an extra advantage in global trade, by making exports cheaper.
Edwards argues that it is actually the Chinese government’s efforts to stem a growing housing bubble in the country but has the potential to create deflationary pressures globally, stunting the already sclerotic growth plaguing the world economy.
As he puts it: “With the Chinese economy set to slow noticeably over the next six months as the authorities restrain yet another housing bubble, it is the global deflationary impact of a weak renminbi that we need to watch closely and especially whether the targeted trade-weighted CFETS basket also breaks to new lower levels.”
Edwards goes on to say: “Clearly prudence is now out of the window. Whether the renminbi falls to 7.1, 8.1 or 9.1 the story is the same. Investors are underestimating the magnitude and deflationary impact of renminbi devaluation. Sterling, meh!”
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