Hey There Income Hunter,
China’s ministry of finance announced yesterday morning that it is considering allowing local governments to sell 1.5 trillion yuan ($220bn) of Chinese bonds in the second half of 2022.
This would be an acceleration of infrastructure funding used to shore up the country’s economy, which has been beaten up by the Covid lockdowns.
The announcement gave a big boost to the market, especially the Global Copper Miners ETF (COPX), which was up over 8% at one point before closing +6.25%.
As long as China is able to reopen its economy, I see the global economy getting a nice boost from China in the second half.
Today I will take a deeper dive on China’s potential and which commodities to consider playing from the long side.
China: The Lone Stimulator
China, the second largest economy in the world after the US, is capable of providing a huge boost to global GDP.
The chart below shows the difference in balance sheet expansion between China and Europe …
China’s balance sheet has expanded by 11% YoY while Europe’s has shrunk by 6%.
This major divergence in the balance sheet usage will have a dramatic impact on the performance of the Yuan versus the Euro and the US dollar.
China’s Rate Differential Will Also Boost the Yuan
The rate differential forecast, shown in the chart below is also a major plus for the Yuan.
The chart shows the change in each country’s policy rate with China going up the least compared to the major players on the global stage.
So far,, the dollar has held its own against the Yuan as the Fed’s tightening policy has boosted its attractiveness to foreigners …
However, the inevitable Fed pivot back to QE will weaken the dollar to most currencies – but especially the Yuan as their economy sees accelerating growth into 2023.
WisdomTree Chinese Yuan Strategy ETF (CYB)
The setup for China going forward is bullish for the currency. CYB is an efficient way to play for the yuan outperformance versus the dollar.
Notice the CYB chart below showing yesterday’s move above the 50 DMA on higher volume.
CYB’s volatility is low so traders can buy longer-term outright calls and sit with them. I purchased $26 calls for $.40 to the October expiration.
Bring It Home
The earnings season ahead of us should awaken the market to the fact that the Fed will not be able to tighten much longer.
Recession is still not priced in fully and this reality will weaken the dollar, especially to the Chinese Yuan.
The inevitable Fed pivot presents many great trading opportunities and I will be covering this very closely.
Stay tuned and as always …
Live and Trade With Passion My Friend,
Griff