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As CNYJPY Jumps To QE2 Levels, What Odds Are Markets Implying Of A China Hard Landing?
With tonight's multi-year record CNY fixing and trillions being flushed at maintaining an arbitrary JPY line in the sand, it seems appropriate to re-consider how to hedge a China hard landing and what probabilities various asset classes are assigning to it occurring. While many are pointing to what seems an entirely capricious level of 79.20 JPY to the USD as the 'new normal' being defended, we were curious at the strange coincidence that the CNYJPY cross implied by tonight's CNY fixing and the 79.2 JPY was exactly the average CNYJPY level during the QE2 period. It seems the Japanese are hedging their tail-risk against the Chinese and a recent note by Morgan Stanley points to how various asset class traders might consider hedging their own version of a hard-landing scenario and notably they agree with us that China sovereign CDS remains among the 'best' hedge.
Morgan Stanley recently published a series of well-considered articles on 'The China Hedge' as part of their cross-asset-research. It seems with the G-20 meeting and increasingly unilateral behavior cracking the Nash equilibrium at its margins and as usual - first one to migrate, wins. For clarity, MS defines a hard-landing as:
a slowdown in Chinese GDP growth to sub-5% for at least four quarters, driven by domestic factors, not external events.
From the MS note:
We see the probability of a hard landing as low, but not low enough to make hedging costs irrelevant: China-related assets have increasingly been driven by fears of a hard landing and hopes of policy easing. As a team, we’re not in the hard-landing camp, but we also recognise that a hard landing would have major implications for global markets and particularly for the most China-sensitive assets in equities, credit, rates and FX in Asia. For many investors we speak to, this represents the biggest downside risk to Asian markets.
Aussie rates are the clear winner (and we have liked Aussia bank credit over corporates for a while also as a systemic slow-down trade).
And as far as the best hedges (from a risk-reward-cost perspective):
FX and credit: the best China hedges across all assets: FX puts (CNY in particular) and CDS (China sovereign in particular) look most compelling on our analysis, with equity and rates hedges generally more expensive. This is a change from earlier in the year, reflecting markets repricing in the past months.
And specifically the pros and cons of the four most efficient hedges:
The considerable compression in China CDS recently (combined with the rise in DTCC exposure) offers both an increasingly liquid and 'cheaper' hedge than at any time in the last couple of months and while CNY Puts (FX) make sense, there remains considerable concern with regard the jumpy-nature of the NDFs. ITRX Asia is perhaps the most basis-heavy hedge but by far the most liquid - particularly given the perspective that credit will be the first thing to be withdrawn. Of course, with tonight's actions, it is hard to say whether currency wars are escalating or this is some odd agreement among every one but the USA to ebb towards a gold standard to avoid an inevitable money printing endgame? Of course, the modest rise tonight in China CDS, bounce in gold, and 1% drop in ES suggest risk is off for now and perhaps grabbing some affordable hedges is in order.
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dumb and dumber.
china had the chance to break the circle.
instead, they shot themselves in the face.
Angela and Hillary will come out and proclaim "let them eat pandas" anytime now.
Come come Ahmee, those old Opium trading houses are merely playing the world along. All of them.
China having a hard landing and the Chinese havign a hard landing are two entirely different animals.
Of course the Chinese are going to have a hard landing. Even the farce of their peg, which will ultimately sink them.... one big, very well co-ordinated drama. i think the Club of Rome AI machine must be about ready to get self-aware.
ORI
Awesome Art
OT
Hi ORI,
would love to hear your thoughts about this 2009 interview with German philosopher Sloterdijk.
http://translate.google.de/translate?sl=de&tl=en&js=n&prev=_t&hl=de&ie=U...
Thanks.
PY
German philosophers continue to be comical whilst once again failing to acknowledge the power of love.
'When the power of love overcomes the love of power the world will know peace.
Jimi Hendrix'
OT. Sorry.
Ron Paul's big Win (Featured on CNN Homepage)
http://politicalticker.blogs.cnn.com/2011/10/29/ron-paul-wins-both-talli...
NATO will punish Iowa for such blatant human rights violations.
The re-Paul-ution has begun.
Belay that order, men! Iowa has no gold bars or oil. Attack north, invade Canada! They wouldn't vote for that Ron Paul fellow anyway.
Hell of an idea, Brownie!
To hell with that noise. I'm from Iowa.
We may not have many gold bars, but I know we've got some.
;) Don't tell nobody.
'The re-Paul-ution has begun.'
For a sec I thought it read ru-Paul-ution, which doesn't make sense cause that's what we have now.
Stated in political terms, if you're a Chinese Politico, and you see how massive unemployment and economic discontent has ushered in sweeping social and political unrest the world over the past several years, if faced with the difficult choice of maintaining profit or maintaining (as well as can be achieved given the circumstances) maximum employment, would you:
1) Choose to implement policies that keep the factories humming and paychecks flowing, or
2) Allow for rising unemployment (and maybe massively so) as each segment of your centally planned economy suffers lost profitability (and quite probabilistically real and rising losses).
?
There's a reason certain things are subsidized (think SNAP cards in the U.S.) in most nations, and that a demographic reality in China keeps central planners up at night sweating the unemployment data.
Somewhere in China there are technocrats constructing economic models that tolerate rising inflation and increasing levels of private sector losses (to be at least partially subsidized by the PBOC) in the interest of mitigating what would be a fast rising unemployment rate, all for the sake of maintaining social and political order.
And if this is remotely rational, then China is damned fortunate to have such a large national surplus (with which to absorb losses and use as leverage in economic and political dealings).
ETF, You could be right. Their technocrats implemented #1 right after their last (and only) QE: You can have no hire, but I am telling you no fire policy.
So bottomline would suffer but heck who cares about profits when I am charged with protecting the working class?
And now they keep increasing the social benefit costs (upward of 20% so far).
Very good post.
I think hedge funds will go for the ASX200 puts/short, cheap, that and the AUD.
en masse
Does that mean USD strength by other currencies weakening.
i've said it b4 on ZH and i'll say it again, china's 'landing' has been predicted for a long time - the last 10 years by some here in oz - but they keep kicking the can down the road like everyone else.
my advice tells me its 1 to 2 years away... thats better than before as the advice used to be no timeline given.
its getting closer... but not yet, i'll be preparing for 12 months hence.
Such "hedging" strategy once again shows how Wall Street sells craps of its own making. If you believe all the serious business people who made accumulated huge wealth in China by being stupid, than buy the China sovereign CDS all you want, 'cause these guys are waiting for high bids to hit.
hey! welcome to zeroHedge!
the chinese aren't styoooopid, but they have bought LOT of Western financial & bankstering bullshit
goes well with the communist central planning mentality~~same as in new york, london. tokyo..., and those swaps were more popular a week ago, too
but, maybe we'll all get really lucky, eh? and maybe one of the new rules or changes or schemes or adjustments or bailout plans will actually work for a freaking change!
suuuure... i mean, what could possibly go wrong?
So what does all this make the #Occupy unfounded ESFS out of the money calls on credit event impaired, theoretical negative value, 100% annual default rate, 0% recovery assumptions equity layer worth?
Fishteen and four, a miniplenty to be sure.
3.14? yeah! that's the ticket!
speaking of laundry, isn't there s'posed 2B some gold delivered soon to a country in SA?
i wouldn't be surpriZed if germany has decided to leave all it's bullion in NY & london
why? b/c it's safer there! L0L!!!
B0O0O0O0oooo, BiCheZ!
BoJ is going to have to be convincing this time. I'm not sure if they understand just how many Yen they'll have to pull out of thin air to fight off market forces.
Doesn't matter they need sales. Nintendo's blown a billion dollars in the last 6 months. Toyota and yamaha and fuji heavy industries and poloroid and everybody is in a shit storm. If they don't get a sales boost they are in trouble. If they don't keep people busy and distracted they'll crawl up the nuclear industries ass and scratch at their insides.
Once the willingness to pretend everything will be alright blows away. Who knows.
Have you seen these remarkable photos of Japan?
http://blogs.sacbee.com/photos/2011/09/japan-marks-6-months-since-ear.html#mi_rss=The%20Frame#storylink=misearch
Hard or soft landings the overall end result will still be globally nasty.
whatever odds the markets are implying for a hard landing, they are bullshit
obviously, it is either gonna be a hard landing or it's not
fity-fity, BiCheZ!
That's alot of visitors, first person who tells me the significance of that number --I will buy them 1 month membership to Break Point Trades and will announce the winner on the blog!
See simple question here, and win $40 value!
http://oahutrading.blogspot.com/2011/10/knowledge-quiz-win-free-month.html
why don't you stop trolling before somebody pushes yer fuking face in, toy boy?
Weekend Report
http://thethoughtfultrader.blogspot.com/
The gold sentiment chart really shows the emotional nature of this market as user sentiment is clearly a contrarian indicator. Last weeks low user sentiment reading was followed by the move of gold out of an early cycle low. i think we were all expecting gold to work its way down to extreme oversold conditions. Now sentiment has caught up we could also see some profit taking this week in gold. Id suggest that this may be a good place to purchase mining stocks should we see this weakness flow through to that particular sector.
Fuck. I guess it's bad to wake up, look at the screens, and take three shots in a row?
Yes.
It means you have a gambling problem ;-)
Yeah. I have to get the hell out of these markets. This shit lately is just outrageous. Need an account in every time zone and never sleep I suppose.....
Don't understand why hard landing of China became so popular among a bunch of bankrupted investors overseas.
wishful thinking at its best.
Well they're doing a pretty shitty job of supporting 79.20. Now 77.84 and sliding, so lost over $1.50 already. They're going to need to do another mass purchase of the dollar, otherwise, what's the point!
hhmmm not to sure about chine / soveriegn cds after last week.
we seem to be enetering the governmental arbitrary area...now that the eu put pressuse to recognise non-default terms, who is to say that the chinese begin to also put pressue on for 'any reason we like, cos if its good enough for the eu, then its good enough for any reasons we want'. Once that jenie was released from the bottle, its hard to put it back in
China will take a voluntary hard landing so as not to trigger any CDS's from kicking in.
What's CDS? Who sells CDS?
After what we saw in Europe with CDS being essentially declared null by fiat, if the hedge is not exchange-traded with specific language about imposed write-downs, no can do.
Very simple. China is bailing out Europe.
Correct version:
Very simple; China is bailing out of Europe.