CNH: Back To Outperforming On Global Recession Fears?

The CNY NEER has fallen just over 1% from its recent peak. The first chart below plots the CNY NEER and the ratio of China equity performance to global equity performance. Through much of July China equities have unperformed the rest of the world trend. This also caught up with CNY FX performance. As we outline below though, these relative trends could start to stabilize reverse somewhat.

Fig 1: CNY NEER & China Relative Equity Market Performance

Source: MNI - Market News/Bloomberg

• If recessionary fears become a dominant theme in global markets there is certainly scope for these underperformance trends, in terms of relative China asset performance, to stabilize/reverse somewhat.
• To be sure, there are certainly clouds over the China growth outlook given the continued dynamic covid zero strategy. There is also concern around the housing sector, particularly in relation to mortgage repayments.
• Still, data momentum is moderating faster in the EU and US, at least according to Citi EASIs, see the see second chart below. At the margin, stimulus efforts in China could help as well, notwithstanding the challenges outlined above.
• If such trends continue, CNH may outperform in the FX space against higher beta plays and the EUR. Performance against the JPY is less clear given its historical outperformance during global recessionary periods.
• This Sunday's China PMI prints will be the next key update in terms of relative data trends. The market is forecasting resilient outcomes at this stage (manufacturing at 50.4 versus 50.2 in June, 53.9 for non-manufacturing versus 54.7 last month), particularly relative to the EU and US trends from late last week.

Fig 2: Relative Citi EASIs

Source: Citi/MNI - Market News/Bloomberg