* Eye of the storm - not for much longer?
China hiking rates - positive from a macro rebalancing point of view - but not from a shortterm liquidity and global growth point of view. As Ive mentioned earlier; globalrebalancing = global deleveraging.
As the cost and volume of the Chinese currency reserves have accelerated drastically, so has the exposure and the entailing risks. The cost of sterilization is sure to increase as the humongous currencyreserves have been allowed to accumulate over time, pushing inflation higher in the process. So far, the sterilization measures have not been adequate as only part of the currencyreserves have been sterilized. As imported inflation from commodities etc has also increased, a stronger currency is just what the doctor ordered.
The cost of sterilisation will now increases with the latest rate hike, (I believe this is just the beginning ), the Chinese authorities are likely to have concluded that it is in their best interest to increase the pace of Yuan strengthening. There are obvious risks to Chinese growth in this process. The authorities will have to walk a tight rope, but I doubt they have much choice. Fingers crossed.
This also means its time for liquidity drunk market participants to sober up - fast.
* What will happen from here?
Asian currencies to continue strengthening against the USD as they get dragged along by the CNY. The Usd to strengthen against everything else.
Gold and other supercrowded commodities to suffer. This will also be a structural phenomenon and not just shortterm. See global rebalancing above for explanation.
I also have a few other very interesting trades to get into from here, but Ill save those til later.
I would like to point out that Emergingmarkets in general are also supercrowded trades and would be looking for signs these are about to reverse. Liquidity is low and will not increase on any such development,,,,,,,,
*Positions and positionchanges
-Long GLL ETF (leveraged short Gold).
-Long SOIL ETF (leveraged short Oil).
-Long SCOP ETF (Short Copper).
- Short Aud/Usd
- Took profit on short Eur/Cad
As usual, good luck
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