Nomura: China Holds The Key To Japanese Yen

Via Nomura's Bilal Hafeez,

Overnight, we received the latest data for Chinese growth, and on balance they were weaker than expected. Our economists continue to look for the weakness to persist. The challenge for the market is whether to focus on this likely near-term weakness or focus on the likely stimulus-led bounce in the second half of this year.

Government wants pick-up

The key government-driven measures of infrastructure investment and credit appear to have reached a trough after a year of weakness, but have yet to establish a firm upward trend (Figure 1). Meanwhile, Chinese stocks appear to be focusing on the prospective stimulus rather than the current weak data (Figure 2).

Yen tied with Chinese growth

As for currency markets, the dollar appears to be ignoring the Chinese cycle with the euro having only a weak negative correlation with Chinese stocks. The Chinese yuan also just has a low (positive) correlation. The currency that does appear to be affected most is the Japanese yen. The strongest correlations with Chinese stocks are all yen crosses. The largest and most stable correlations with Chinese stocks are USD/JPY and KRW/JPY followed by GBP/JPY and EUR/JPY (Figure 3). This means that any weakness in Chinese stocks should see yen strength, especially through these crosses.

US bonds, rather than equities, tied with Chinese growth

Outside of currency markets, we find that US 10yr yields are exhibiting a strong positive correlation with Chinese stocks. US equities and oil prices have positive correlations too, but they are less stable. As expected copper prices have a positive correlation, though surprisingly iron ore is negatively correlated.