Jobs and CNH

Jobs

That was a strange NFP figure as participation continues to drop, driving the Unemployment Rate lower as headline jobs head lower, too. I am skeptical of any meaningful takeaway from this collection of digits. I suppose it shows that old people continue to retire and there is a mild shrinking of both supply and demand for labor at the same time. In other words, the no hire / no fire jobs market continues. Given Warsh’s stated preference for lower inflation but his revealed preference not to hike, I suppose this plays into the hands of the doves.

It will be interesting to see if the MOF use this as an opportunity to drop the hammer on USDJPY again. It would make a lot of sense, but they also don’t have unlimited firepower, so perhaps they will just be happy we’re back below 158.00 and leave it alone. They have significant, but not unlimited firepower.

In terms of the implications of this number for markets, I don’t think it’s a game changer. The number tells you more about U.S. demographics than it tells you about the U.S. economy. Sure, it’s a bit on the weak side, but it’s too convoluted to suggest anything nefarious. Supply is falling and demand is falling. What will the Fed make of that? More likely, today’s NFP number will be forgotten by Monday and CPI will matter more than jobs.

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China

Simon Flint, our EMFX expert at Spectra, has been noting that ever since the Politburo meeting last week, China appears to be less willing to allow yuan strength. He has provided strong evidence of this in the behavior of the fix, and last night he wrote about the price action around the China close. Here is what he wrote:

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USD/CNY – CHINA IS MANIPULATING ITS CURRENCY — SHOCKER!!

I’m more confident that China has halted CNY appreciation (at least for the time-being) & would be short CNH here.

Fascinating to see the official 4:30pm USD/CNY close (CFECCNY Index) come in at 6.7501, despite spot spending most of the day around 6.7470.

USD/CNY TODAY

I see this as evidence that the PBoC is influencing the inputs used in the fixing calculation (which has re-incorporated the 4.30pm close since July), consistent with an intention to slow—or even halt—further CNY appreciation.

In fact, they’ve been doing this all week:

Average USD/CNY Intraday Path, 03AUG to 07AUG

But maybe, they always do this?

NO! In fact, during the period with a very clear appreciation bias (June 30-July 15, this final day being the date of the release of the poor Q2 GDP data) precisely the opposite happened. [NB/ My in-sample model for this period has an intercept consistent with a -8% p.a rate of appreciation, compared with ZERO since July 16].

Average USD/CNY Intraday Path, 30JUN to 15JUL

Note/ All data from Bloomberg, with Chat GPT generating the last two charts. Super Qs from Phil Valori to prompt a closer look at this.

Caveat 1: Looking at the intraday paths of USD/CNY and BBDXY this week, USD/CNY has tended to weaken during the afternoon while the broad USD (BBDXY) has generally been firmer. The late-day rebound in USD/CNY may therefore simply reflect the PBoC offsetting that earlier divergence, rather than actively pushing the currency weaker overall. It is also worth noting that the 4:30pm spike is not evident on every day with little sign of it on 4 Aug (although we were anyway above 6.75).

Caveat 2/ China delivered another thumping pumping powerhouse set of trade numbers albeit broadly in line with expectations (exports +23.9% y/y vs +23.0% consensus; trade surplus USD112.5bn vs USD107.1bn expected). Thus: hard for Beijing to justify resisting CNY appreciation. The Politburo has said it wants more balanced trade—supposedly by boosting imports—but there is little evidence that this is being achieved.

That said, the headline triumph probably masks a very mixed picture. High-tech exports are booming, but many of the lower-value-added, more labour-intensive sectors are performing much less well. Anyhow, whatever the underlying logic, both the fixing behaviour and the 4:30pm closes suggest the message from policymakers is: “We’ve just hit the brakes.”

WHAT ABOUT TODAY’S FIXING

Today’s USD/CNY fixing came in at 6.7904, almost exactly in line with my model prediction of 6.7899.

Big picture: since the July 30 Politburo meeting—the key scene-setter for H2 economic policy—USD/CFETS has fallen ~0.75%, yet the fixing is higher in USD terms. That suggests the pace of RMB appreciation has stalled, making it difficult to justify short USD/CNH given the negative carry.

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While it’s rare to hear about anyone going long USDCNH these days, Simon has been advocating that position, and the idea makes a lot of sense to me. The carry is pretty good, too. In fact, if you whip out Johnathan Tan’s carry/vol machine, you see USDCNH is right on the efficient frontier (please see chart further below). The reason that USDCNH has not been a consideration for carry traders is that the carry has been more than offset by the appreciation slope (higher CNH, lower USD).

If the PBoC is pushing back on CNY strength, you are likely to see lower vol and so that is even better for the carry trade. If you can trade digitals, have a look at some of these ballpark levels. And if you like any of them, please come to me for more accurate pricing and friendly execution. The idea works best if you are bullish USD, but the carry helps you so much that you can buy something ATM spot (6.75) for sub-30%. Risking 4 to make 10 (approx.) on a 1-month bet that USDCNH finishes above 6.74 looks positive EV to me.

Given Simon’s writeup, I think the base case here for USDCNH is that it goes nowhere or slightly higher over the next month so I like the 1-month 6.74 digital call best. PBoC policy could change back to appreciation at some point, so the 2-month and 3-month options do not look as attractive to me. If you don’t trade exotics, you can do this via skinny call spreads. Buy 6.7300 vs. sell 6.7400, for example, for around ~33 pips. Paying 33 for a maximum 100-pip payout, that is. I like it. I am adding that to the sidebar.

And here is Johnathan’s map of carry/vol territory. I circled USDCNH in red.

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Calendar

CPI is the biggie next week as US CPI overshadows and RBA on permahold and a Norges Bank that is also unlikely to adjust rates. Still a ton of earnings, but most of it is second tier. Retail Sales and PPI also on tap for America. Have a great weekend!

Crappy Design finding synergy with Pizza Crimes on Reddit (posts one day apart)

Pizza Crimes is a subreddit we probably don’t need.

good luck ⇅ be nimble