Choisissez votre langue

Search

Renseignements

Aucune correspondance

Services

Aucune correspondance

Secteurs d’activité

Aucune correspondance

Personnes

Aucune correspondance

Renseignements

Aucune correspondance

Services

Aucune correspondance

Personnes

Aucune correspondance

Secteurs d’activité

Aucune correspondance

Euro-China at a Three-Year Low - Global Exchanges

FICC Podcasts 26 octobre 2021
FICC Podcasts 26 octobre 2021

 

Disponible en anglais seulement.

In this week's episode, we discuss the recent moves in the euro and the Chinese renminbi that have combined to push the Euro-China cross down to 7.40.

Follow us on Apple PodcastsGoogle Podcasts, and Spotify or your preferred podcast provider.


About Global Exchanges

BMO’s FX Strategists, Greg Anderson and Stephen Gallo, offer perspectives from strategy, sales and trading on the foreign exchange market, related financial markets, and the global economy.

Podcast Disclaimer

LIRE LA SUITE

Greg Anderson:

Hi. Welcome to Episode 23 of Global Exchanges, a podcast about foreign exchange markets and related issues. I'm Greg Anderson. In this week's episode, my co-host, Steven Gallo, and I will be talking about the combination of recent moves in the Euro and the Chinese Renminbi that have combined to push the Euro China cross down to 740. The title for this episode is Euro China at a Three Year Low.

Stephen Gallo:

Hi. I'm Steven Gallo, a London based FX strategist. Welcome to Global Exchanges presented by BMO Capital Markets.

Greg Anderson:

Hi. I'm Greg Anderson. A New York based FX strategist. I'm Steven's co-host.

Stephen Gallo:

In each weekly podcast like today's, we discuss our perspectives on the global economy and the foreign exchange market. We also bring in guests from the FX industry and from related financial markets, like commodities.

Greg Anderson:

We strive to make this show as interactive as possible. So don't hesitate to reach out by going to BMOCM.com/global exchanges. Thanks for joining us.

Speaker 3:

The views expressed here are those of the participants and not those of BMO Capital Markets, it's affiliates or subsidiaries.

Stephen Gallo:

Thanks for the usual intro, Greg. As you rightly point out, there is at least one place in the FX market right now where we're seeing a breakout of sorts in the price action, and that's in Euro/China, which is toying with a potential test of levels below 740. We haven't seen levels below 740 since about mid 2018.

Greg Anderson:

Right. So here we are on October 26th, with all kinds of quote unquote live central bank meetings coming up around the globe over the next two weeks and meetings that one would think would be driving interesting FX moves, but actually things have sort of stalled out in the big dollar key crosses like Euro/Yen, recently volatile crosses like Aus/Kiwi, but here we are with this stealthy, but very interesting move in Euro/China. Steven you're our lead analyst for both currencies. So if we're going to have a conversation about the cross, you'll end up doing most of the talking. Are you okay if I ask you a few questions about the fundamentals underneath this move?

Stephen Gallo:

Sure. Fire away, Greg.

Greg Anderson:

Okay. So here's my first question. We've seen parallel energy crises of sorts in Europe and China over the past six weeks. Europe's energy crisis seems to be part of what's behind Euro weakness. Why haven't things worked the same way for RMB?

Stephen Gallo:

Greg, I think that's a perfect question to ask because the Euro area and China are both huge energy importers. My sway on things is that the main distinction between the Euro area and China, in this case, can be summarized with one word and that's policy. But what I'll do, for the sake of this podcast, is break that one word answer down into a bit of detail. So first, on the energy policy side of the equation, the European Union's transition away from fossil fuels has been very rapid. And what we know now, from looking at the evidence, is that this has placed a lot of upward pressure on European gas and fossil fuel prices because natural gas and L and G are a bridging in between the cleanest and dirtiest forms of energy. And because power generated by renewables is intermittent, which means European energy providers have to hold fossil fuels in reserve as a backup. By contrast, my interpretation at least, is that China's transition to renewables isn't happening as quickly.

Stephen Gallo:

So the hit to its manufacturing base hasn't been as severe, at least not yet. So when you look at the cost of emitting carbon in Europe and you juxtapose that with the EU significant energy import dependence, there is a bilateral competitiveness hit to the Euro, which is brewing here, I think, Greg. To be clear, China has experienced power cuts, energy shortages, and the like, but if you look back at 2021 and the steps policy makers took this year to slow the pace of credit growth, by definition, this is a means of inflation control, which in a sense, places Chinese policy makers ahead of the curve. So from a policy perspective, 2021 for China has been almost all about self-induced cooling of the domestic economy. Europe situation, by contrast, I think has taken many policy makers by surprise,

Greg Anderson:

Just following up on that, you talked about energy policy and economic policy, but not really monetary and FX policy. How would you contrast the ECB's monetary response to China's FX policy response over the past six weeks, which is the period over which we've seen a big wave lower from seven 60 to seven 40 in the Euro China cross exchange rate?

Stephen Gallo:

I think, broadly speaking, Greg, that they directly oppose one another. The ECB has effectively prioritized what it calls the preservation of favorable financing conditions over being hawkish on inflation. And I think that it's very much driven by the ECB's role in supporting Euro area credit markets. By contrast, everything Chinese policy makers have done, be it in terms of targeted relatively low levels of liquidity provision or letting the currency appreciate, has suggested that they think there is a risk that this period of high inflation isn't going to dissipate quickly. Maybe also, what I think is important to grasp from the Chinese angle, Greg, is that with the economy cooling off, capital inflows related to R and B appreciation pose less of a potential headache for Chinese policy makers in terms of the influence these inflows have on domestic money supply growth, inflation, and also financial imbalances.

Greg Anderson:

Before asking my next question, let me just preface by saying that many breakout moves in exchange rate pairs happen when there's a sudden divergence in economic growth rates of two economies. Can that explain this Euro China move? Is Europe's economy suddenly doing a lot worse comparatively?

Stephen Gallo:

So I don't think a widening short term growth differential is behind this move in Euro China, Greg. I could be wrong, but for now I think the FX market is mainly focusing on the fact that both economies are slowing synchronously. So I would turn your attention back to the structural medium term competitiveness issues in play here and the cyclical ones related to monetary policy. I think they're the main drivers of this move in Euro China.

Greg Anderson:

Last question. Where you mentioned Europe's deterioration of competitiveness, could you describe for our listeners the evolution of the bilateral trade balance between the Euro zone and China over the past two or three years? Is there a devolution of European competitiveness showing up there that is maybe a key driver behind the FX move?

Stephen Gallo:

Greg, I really do think there is, based on the data I can see and also my interpretation of that data. So firstly, from a Euro area perspective as a whole, the goods trade deficit with Asia has simply been getting bigger over time. If you look at Euro stats data to the point where I think it's now about one and a half to 2% of Euro area GDP, and this is the important point, the trend is toward a worsening trade deficit. But I also think it's important for us to break it down a bit and take a look at one important piece of that overall trade position with Asia, and that's Germany. Germany runs a modest bilateral trade surplus with China And that trade position with China has actually improved since about 2010. But one of the things that's important here from an exchange rate perspective, is that the improvement in Germany's trade position with China has occurred alongside a depreciation of the Euro's real effective exchange rate.

Stephen Gallo:

So that's nominal adjusted for CPI inflation rate differentials. So what's the medium term angle here? Well, I think it's an open question whether Germany can leverage its export sector through the forces of globalization in the decade ahead to the same degree that it did during the first 20 years of the Euro's existence. Part of the problem here is the rising operating cost for German industry, and we touched on a portion of that earlier, but I think another portion of the problem is that Asia has now developed its own technologies to compete directly with German manufactured goods. So it's possible that the Euro will have to fall even further in real effective terms to make up for these losses. That weren't an issue 10 or 15 years ago. Now the ECB says it does not target the exchange rate, but I would be very surprised if this issue is not something they're aware of. And Europe's bilateral deficit with China and its trade deficit with the rest of Asia is going to be a hot topic within the EU for years to come, I think.

Greg Anderson:

Thanks, Stephen. That pretty much exhausts the questions that I wanted to ask you about Europe and China's comparative exchange rate fundamentals.

Stephen Gallo:

That's good, Greg, because I think I need to ask you about the potential spillovers from this move in the Chinese reminbi to other parts of the FX space. I think the two currencies which may interest our audience the most are the Australian dollar and the Japanese yen. Can you give us an indication of where the spillover risks for these currencies are?

Greg Anderson:

Thanks for bringing up the yen, and that brings us to an important point. In today's podcast, we're trumpeting the Chinese renminbi hitting its strongest level against the Euro since mid 2018. But actually, reminbi hit its strongest level against the yen since mid 2018 a week ago. So it's a very similar move and one that suggests that the Euro China move is much more about China than Europe. It looks to me that CNY JPY, and that's really the cross that's traded there, has scoped a trade above 18, the figure, and run higher. But I would note that this is a much more politically sensitive exchange rate for China than Euro China. So if it seems to be moving too far, too fast, China might put the brakes on this. With regards to Aussie, historically there has been an on again and off again, pretty strong correlation between the reminbi and the Aussie.

Greg Anderson:

I would describe the fundamental connection underneath that as a correlation it's growth driven. So if the RMB is rallying because of strengthening Chinese economy, then Aussie would also rally too because FX markets price in higher export growth and therefore higher economic growth for Australia. But that's not the dynamic we're describing here. So I don't think that RMB gains will necessarily bring Aussie gains, however, and for separate reasons, I think Aussie has a lot of room to rally, but that's because the market is so short of it. And the market is so short due to RBA dovishness, well, at least compared to peers like RBN ZED and the Bank of Canada. If the RBA were to begin to turn the ship on that just a little bit, Aussie USD could rally to 78 cents in a hurry, but I wouldn't tie that back necessarily to the RMB.

Stephen Gallo:

That's a great segment, Greg. I think we've given our listeners enough to chew on for one week. Let's wrap it up here until next time. Bye for now.

Greg Anderson:

Thanks for listening to global exchanges, listen to past episodes and find transcripts at BMOCM.com/globalexchanges.

Stephen Gallo:

We'd love to hear what you thought of today's episode. You can send us an email or reach out to us on Bloomberg. You can listen to this show and subscribe on apple podcast, Spotify, or favorite podcast provider.

Greg Anderson:

This show and resources are supported by our team here at BMO, including the FICC Macro Strategy Group and BMO's marketing team. This show is produced and edited by Puddle Creative.

Speaker 3:

This podcast has been prepared with the assistance of employees of bank of Montreal, BMO know [inaudible 00:12:31] Incorporated and BMO Capital Markets Corporation together. BMO, who are involved in fixed income and foreign exchange sales and marketing efforts. Accordingly, it should be considered to be a product of the fixed income and foreign exchange businesses generally, and not a research report that reflects the views of disinterested research analysts. Not withstanding the foregoing, this podcast should not be construed as an offer or the solicitation of an offer to sell or to buy or subscribe for any particular product or services, including, without limitation, any commodities, securities, or other financial instruments. We are not soliciting any specific action based on this podcast. It is for the general information of our clients. It does not constitute a recommendation or a suggestion that any investment or strategy referenced herein may be suitable for you.

Speaker 3:

It does not take into account the particular investment objectives, financial conditions, or needs of individual clients. Nothing in this podcast constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your unique circumstances, or otherwise constitutes an opinion or a recommendation to you. BMO is not providing advice regarding the value or advisability of trading in commodity interests, including futures, contracts, and commodity options or any other activity, which would cause BMO or any of its affiliates to be considered a commodity trading advisor under the US Commodity Exchange Act. BMO is not an undertaking to act as a swab advisor to you, or in your best interest in you to the extent applicable you'll rely solely on advice from your qualified independent representative in making hedging or trading decisions. This podcast is not to be relied upon in substitution for the exercise of independent judgment.

Speaker 3:

You should conduct your own independent analysis of the matters referred to herein together with your qualified independent representative if applicable. BMO assumes no responsibility for verification of the information in this podcast. No representation or warranty is made as to the accuracy or completeness of such information and BMO accepts no liability whatsoever for any loss arising from any use of or reliance on this podcast. BMO assumes no obligation to correct or update this podcast. This podcast does not contain all information that may be required to evaluate any transaction or matter, and information may be available to BMO and or it's affiliates that is not reflected herein. BMO and its affiliates may have positions, long or shorts, and affect transactions or make markets in securities mentioned herein or provide advice or loans to or participate in the underwriting or restructuring of the obligations of issuers and companies mentioned herein. Moreover, BMO's trading desks may have acted on the basis of the information in this podcast. For further information, please go to BMOCM.com/macrohorizons/legal.

Greg Anderson Chef mondial, Stratégie de change
Stephen Gallo Chef de la stratégie de change pour l’Europe

Autre contenu intéressant