With this in mind, we take a look at some of the key currency calls investors are likely to have to make in 2017.
Renminbi
The renminbi’s largest two-day gain on record caught global markets expecting the currency to continue the gradual slide seen in the final quarter of 2016 off guard and saw the People’s Bank of China strengthen the currency’s trading range by the most in more than a decade.
That markets were expecting the currency to continue to fall and were seemingly unconcerned by it presents a significant contrast to the turmoil into which markets threw themselves on the back of renminbi weakness at the beginning of 2016.
As Societe Generale strategist, Albert Edwards, pointed out while January 2016’s slide saw the S&P 500 off to its worst annual start since 1932, the slide in the Q4 was seen by many as “just the mirror image of the stronger dollar in the aftermath the Trump victory”.
However, he said, the most recent rally is likely a short-term interruption in the renminbi’s decline against the dollar. The currency has been driven lower by an accelerating capital flight, he said, adding that investors should be paying attention to what is happening in China and should take the Chinese authorities’ “huge intervention to stamp on the hands of currency speculators” as a signal that “all is not well in the middle kingdom”.
There is of course another way to read the tea leaves when it comes to the China, its currency and particularly the capital flight that has been and will most likely continue to put pressure on the country’s reserves.
According to Teresa Kong, manager of the Matthews Asia Strategic Income Fund, the money flowing out of China is less the flight of capital from worried investors and more about the natural desire for diversification from a population at the receiving end of huge wealth creation in recent years.
“China’s banks have $20tn in deposits, if even 1% of that is taken offshore in search of diversification that will have a huge effect on reserves.”
Matt Cobon, head of rates and FX at Columbia Threadneedle agrees that the 2017 call on China remains a live one and one that it is intimately related to a Trump-led US.
“We are starting to see some shape to the Trump team and where they stand and there are some notable china hawks,” he said. But, he added: “I think the currency issue is somewhat secondary from the US perspective to the trade practices and the lack of a free market.”
