Mighty Yuan - time for a pause or think about the (unintended) consequences

The Chinese Yuan has traded one way only since May. Everybody knows China is the biggest relative winner of 2020 and Chinese equites have started 2021 on a strong note. The question here is whether or not the Yuan is about to take a "pause"? Calling the reversal is probably stupid, but note that the interest rate spread we have been pointing out as one of the drivers of the Yuan bid remains supportive, but has actually been coming down small over past weeks. A year ago very few investment banks spoke of the Yuan about to get much stronger. These days everybody sees it getting even stronger. A further strengthening of the Yuan has great implications that people tend to forget on a day to day basis. As we reminded our readers in December: "Weaker Yuan has a deflationary force, makes China more competitive, and vice versa, stronger Yuan should all things equal be an inflationary global force, makes rest of the world is more competitive." If the stronger yuan spills over and feeds over into an inflationary global force, things could get "dynamic", especially as the vaccination of the world could "boost" this scenario as well (think 2013 taper tantrum). Strong Yuan and US yields moving higher is not a strong narrative at the moment, but watch this relationship very closely. Second chart shows US 10 year vs the Yuan (inverted). The gap is rather huge...