Following the Leading Duck
What copper was really saying
Well, copper was telling us something, just not exactly what I thought. With the benefit of hindsight, the last post should have taken the obvious route that the extraordinary cheapness of copper (by our metrics) was an early signal of economic concerns more generally. In the days that followed every risk market has tanked and bonds have rallied. We could have looked like heroes. The leading duck had set off in a new course and the rest followed.
Instead, we opted for the cute option and picked out what may seem a deviant pairing of copper against CNHUSD as showing ‘interesting’ statistical divergence. As I pointed out at the time, this conflicted with my intuition that Chinese currency should weaken given the signals from the metal’s behaviour. Happily the recent statistical relationships came through and the Chinese currency did strengthen even as copper continued its decline. What is even more surprising is the Chinese currency is showing just as undervalued now as it was when the last post was published.
Recent statistical relationships 1, Conventional wisdom 0.
A second consequence of the ‘catch-up’ by risk assets to the earlier decline in copper is that the red metal is now shown as ‘fair valued’ in our Base Universe of major contibutors to global financial conditions. We argued that copper was cheap against a range of major markets, and that has generally proved to be true - notwithstanding its further decline - because so many important markets have now caught up.
Also worth noting is the statistical relationships of the past year suggest that currencies such as AUD and CAD had pre-emtively fallen in line with copper and reflect similar dynamics to CNH. Overall, it looks like these markets showed early concern for an economic slowdown that latterly afflicts major stock markets. Accordingly, AUD, CAD and CNH may already have absorbed the bad news. On our metrics, these currencies now show up as statistically undervalued and biased higher. That would be a pretty non-consensus result, but it is what past relationships suggest.
I somehow doubt the CNHUSD has much further to rally, though I should prepare to be surprised again. If global economic activity is slowing, the Chinese authorities will be keen to exert pressure against a stronger currency.
A word should go to Japan’s Nikkei which had previously had a good year, but is now placed squarely at the bottom of the valuation score relative to the rest of the financial universe. The violence of the move has not been seen in decades.
I think CNY/CNH is reacting more to JPY's strength, than to anything else. consider how much it has weakened vs. the yen and the Chinese are not feeling very concerned right now I would argue. a 2% gain in the renminbi vs. a 10% gain in the yen leaves china in a very good spot