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How To Trade China's "Nuclear Option" Devaluation, According To SocGen
China has officially gone the "nuclear route", SocGen says, and the read through for the global economy is not good.
The rather obvious takeaway from Beijing's FX stunner (and this would have already been clear to anyone who bothered to check the very three economic indicators that Premier Li Keqiang believes are the best gauge of economic activity in the country) is that things are far worse in China than most people were willing to admit, and when your export-driven economy is tethered to a surging currency that was set to strengthen even further in September on the heels of a possible rate hike, maintaining the peg comes at a cost.
Of course until now, everyone seemed willing to pretend that because China was somehow able to withstand the pain even as the yuan appreciated on a REER basis by some 15% in a year, that things must not be all that bad under the hood. That illusion was shattered on Tuesday.
Here's Bloomberg summarizing SocGen's take (spolier alert: it's horrible news for global demand and commodity prices, could delay Fed liftoff, and it raises the risk that the global deflationary supply glut will get worse) along with some favored trades for playing the Beijing currency nuke.
China triggering "nuclear option" of devaluation may be sign eco challanges are "much more severe than perceived thus far," SocGen strategists led by Ramon Verastegui write in note.
China eco challenges pose risk to global growth/inflation, Fed Sept. liftoff scenario, could further lower ylds at long end of curve.
Selloff in commod prices, related industries may continue as mkt discounts China slowdown, risk of supply glut from unwinding of CCFDs
Buy USD contingent flattener floors; 6M 5y-30y USD curve floor, strike ATMF, contingent on USD 2y
Buy TLT $126/128 call spread for 71c, buy Sept. IYR $77 call, sell SPY $214 call for 0.38%
Buy SocGen Airline basket (ALK JBLU DAL LUV UAL AAL SAVE HA ALGT)
Buy EWC Oct 22/24 put spread for 40c and Australia (Buy EWA Oct 17/19 put spread for 35c
Trade accordingly, or not.
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Cancel those investment recommendations. Take an Advil, and buy gold instead
Where's SocGen's regular 'sell gold' advice?
Where is Paul Krugman and the window repair teams in Tianjin? Thats stimulus!
Fun ain't over yet. China is going to prop up their economy "even if it hair lips everybody on Bear Creek".....
They haven't finished devaluing yet.Managing every small step down,or trying to.
In all seriousness, how can Chinas devaluing be bad? Everyone else devalues by QE its a great thing, China does it thats bad. Its not anti-competitive as China in what they make doesnt have any competition. Is 2% going to put factory workers out of business in Ohio hardly, as there are no factories left in Ohio... Etc. What am I missing?
Baltic Dry rates are up huge Year over Year per Dryships website.
In all seriousness please explain.
maybe they just need a scapegoat for all things economic not working well. And maybe it provides a pretext for the Fed to do what is required in a situation with a lot of debt and little growth: more QE (inflating away debt) and no rate rise.
just speculating, know or understand little about this stuff. But bitching about China seems more about managing the politics than pure technical economics to me.
Well that was the theory I know, we are now running on food, utilities, insurance, tuition, medical, probably 15% year over year. House prices are at best flat, salaries are at best flat, etc. So Stagflation does not deflate the debt away it makes it a hell of alot worse.
"In all seriousness, how can Chinas devaluing be bad? "
It doesn't work. See Japan. At best is will buy some time, but China is completely different than Japan.
"Everyone else devalues by QE its a great thing, China does it thats bad."
China was the only major industrial power with economic growth (stiumulous driven but it was driving up commodies and creating real demand) now that China growth is gone, its going to have worldwide reprecussions. Importing less commodities, energy, and manufactured goods from other Industrialed nations. Thus fewer exporting jobs outside of China.
Gator, I think you've nailed it. No explanations needed. But in the news racket, every change is raw material for a sensationalist story. Ooh! The sky is falling.
As you imply, China's devaluation is merely business as usual. The only problem is that a world of "central planners", "bankers", and "investors" didn't factor this reasonable move into their deeply flawed plans (read "deeply flawed fantasies).
If you're playing musical chairs, you can't get too involved in the music itself; you must keep your eyes on a chair. The real news story is not that China devalued. The real story is how dumb everyone who ignored that possibility is.
thank you. honesty is a breath of fresh air.
buy gold instead
+1. Has anyone else mentioned what a forced Yaun devaluation path by China will do to China's already insatiable appetite for gold?
3rd time (yuan devaluation) is the charm. Let's get it another 2% down.
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eco challanges are "much more severe than perceived thus far,"
Perceived by you.
The only way to win is by not playing the game.
Is what he said on his wedding night
How about if I just go to Walmart and buy moar cheap Chinese plastic trinkets with my strong dollar. Plus I get the added entertainment bonus watching Walmart people.
http://www.peopleofwalmart.com/
Sorry, but I can't stand having to go three aisles down to go back around to the first one on account of the three beached whales blocking them.
Yeah... I bought goldminers by the boatload and well... PARTY!!! 11% on average for the last 2 days.
Same here. It's party time. Until it's not. Who knows what's ahead.
Check out TSTR on the UK AIM. It's a great recovery play. Oh and there was massive volume that did not show up today. Totally manipulated but a great opportunity.
APPL is up almost 150 bps on the day. Thank god Free Markets saved us.
Thats funny on my screen AAPL is up 5.5% interday today....
I wonder how much that Stick save of Citadel buying long calls is costing.....
What, no Netflix?
Its like getting your execution delayed because you aren't well.
WTF.
It would be great to know Albert Edwards' thoughts.
Nice .jpeg Tylers. Timely, especially with the Tianjin mushroom cloud.
#coldblooded
oh no, china refused to take it in the ass because uncle sam said it would be good.
this is hilarious to watch, and i benefit from it anyways.
"and i benefit from it anyways."
how ?
Black swan...paging ms swan
https://www.youtube.com/watch?v=a2nqRM7sOUw
Never ceases to amaze me how much irrelevant research these banks put out. Guess they have to keep their expensive MBAs doing somethin'.
China has done the 'nuclear' option?
BS... when they either dump Treasuries en masse, back their currency in gold, or demand all payments (yea you Walmart) in Yuan THEN they have launched nuclear options.
A simply devaluation of theri currency isnt the problem... the Western fraud banks using the Yuan for a carry trade WAS the problem, and they just dont want to publicly admit it.
Dovie'andi se tovya sagain (It's time to toss the dice)
The Daily Economist
Banks puting their trust with a Communist Chinese Regime that have no open disclosure?Give me a break,are Fed Officials really that ignorant?
Few words, but even less comprehension.
What does an economy solely reliant on trade flows do when the world decides trade is worth less than money in the bank (mattress) and cannot generate additional credit?
Of course it's silly, because the only difference is that currency represents the possibility to commit waste, while trade is the result of previous waste.
Hey kettle! You're black! - The pot
Apparenly, China is facing a number of conflicting pressures on the exchange rate question. It wishes to have the yuan accepted by the IMF as part of the basket of currencies used to determine the value of the SDR (Special Drawing Rights). Consistent with that objective, it has stated that it will set its exchange rate based on a basket of currencies. Nevertheless, it appears to have deviated from that standard in the last few months by pegging the yuan to the dollar, as the dollar strengthened in the market. It would be interesting to know the real reasons why it made this deviation. In any case, its peg to the dollar has caused increasing damage to its trade position. This apparently became untenable to the point that it decided to slip away from the peg. The changes thus far have not been of a magnitude to justify the dire consequences threatened by some observers. And it may well be justified on the basis of a return to the "basket."
Seriously now, how does one value one worthless piece of fiat against another worthless piece of fiat?? Do the traders all have a roulette wheel with currency values labeled on them? The whole charade is meaningless when every country in the world is insolvent and unable to pay back the vast debts that they have all created.