From Citi’s FX guru Steve Englander, a simple breakdown of how everything revolves around China.
How China Saves The Risk-On World
Ongoing discussion of Chinese official buying of New Zealand bonds, and confirmation by the NZ Prime Minister, gave NZD a sharp boost overnight, following up on earlier gains. Investors drew the conclusion that if Chinese official buyers like NZD bonds so much, they must at least have a bit of a crush on AUD bonds and other risk-related currencies with much bigger bond markets than NZ’s. Hence the spillover into other currencies.
The second driver was the continuation of CNY fixings downward, hitting a new record low. In recent months the CNY fix has become a talisman for G10 investors as to whether risk would be on or off, pretty much on a daily basis. The contrast between how much perception of Chinese investment and currency policy affects markets versus the non-reaction to anything coming out of the G8 meeting is striking.
The good news for investors is that they are long risk and the CNY fix has been supportive of their positions. The bad news is that if conviction on Chinese growth ever gets shaken there is little to support risk-correlated assets.