Thread by @Trinhnomics

Good morning! Hong Kong got T8, basically everything shuts down except for essentials & so I waited for the minibus that never came & took a cab to work (didn't know it was T8). Nice to be at the office w/ it so empty. HK markets closed at least in the AM

Let's talk economics!🤗

This week is a pretty economic week for Asia & the US ( obvs frantic regarding fiscal & politics). In Asia, today we have Bank Indonesia expected to hold.

Needs to do more! With the IDR weak, & it needs to show its independence. Gov needs to remove its effort to change mandate.

If you juxtapose BI (Indonesia) vs RBI (India), then u can see that both are emerging markets but RBI is doing a much better job at PR than BI (although much of it is not BI's fault but the gov itself).

Indonesia has much less gov debt, lower CPI, yet pays more for its debt.

That means India ability to do quantitative easing (latest meeting held but bought more bonds) despite CPI higher than upper range of target for a while (>6%) & investors still confident despite budget & debt blowing up means that it is possible for EM to do QE but w/ decent PR.

In so many ways, India is outdoing Indonesia esp if u look at the metrics that we often use to measure fundamentals (GDP Indonesia > India, Debt Indo < India, CPI Indo < India) but that isn't what assets are saying. India equities, FX & rates are doing much better than Indonesia.

Want to see where we are in the spot FX market? Here are the expanded majors so far in Q4, yes, 2020 is coming to an end & what a relief that is!!!

Asians, esp East Asians or shall I say major electronics/CA surplus, FX are doing best w/ KRW, TWD, CNY and JPY rocking it...

The question is will these guys continue to rally (the common narrative/consensus in markets is that USD weakness in medium term but wut about the short-term)??

One way to look at it is not just vs USD but also on a relative basis & that means a basket of FX key for that econ.

NEER stands for nominal effective exchange rate & that sounds complex but pretty basic in that just a trade-weighted (meaning the weight of the relative FX say TWD/CNY is their trade relationship vs total trade) index. Higher = appreciation, Lower = depreciation. Wut's a REER?

U can deflate the NEER & get the REER by a price deflator (CPI of country vs others CPI) to get whether exports more expensive or imports cheaper.

Instead of showing value, I show z-scores, which basically shows how many standard deviation from the average. Shows TWD expensive.

It just shows that the FX in green is above the mean at a certain degree (read up on standard deviation & z-scores to understand where that is in the distribution, assuming normal). Just because something deviates from mean, doesn't mean it'll revert to mean but it's useful.

Anyway, obvs everyone was talking about China & its weaker than expected fix (CNY can move +-2% of fix) + removal of costs of FX forwards, which basically makes hedging FX less expensive on what it means on future direction of CNY.

The answer to that comes back to economics.

As in, an appreciated CNY reflects the USD weakness but if the CNY appreciates more than USD weakness & strengthens vs its key trade partners on a REER basis by a massive amt, it'd have to have the domestic economy strong enough to stomach worse external competitiveness.

So?

China September trade out of 10am & the expectations are below. So far this yr the trend has been higher exports but lower imports, as in the unwillingness to import more foreign goods so if the CNY strengthens by a lot then the appetite to buy foreign goods = higher. Says theory

Another question is how strong is the Chinese economy? Economic data shows a rebound but PPI still deflated & demand indicators not so great vs supply which is much better. We get data on CPI in 2 days & Q3 GDP Monday. Can it stomach a much stronger CNY? If u think yes, then...

I'll tell u what I'm excited about, US CPI tonight & also some other data like continuing claims + retail sales for September on Friday.

US CPI = 1.3%YoY & expectations that will rise to 1.4%
US 10 yr yield = 0.75% (cost of paying for gov debt)

Real rates le negative!

Some people ask, how does the US pay for its widening debt (everyone debt is widening during Covid-19 FYI)???

Well, well, real rates are pretty negative so despite all that ever expanding debt, costs of funds lower & even much lower considering CPI.

India real rates NEGATIVE.

Well, well, well, let's looksie at India shall we. The latest CPI is HIGHER at 7.3%YoY in September despite all that contraction of growth because of food, yes I know, I know.

But but but, India cost of funding widening fiscal deficit +higher CPI is what? LOWER! Thanks the RBI🙇🏻‍♀️

Bottom line, Tuesday is great esp working when there is a storm & I just looked outside & the clouds are moving rapidly. Busy week & month & it's a sprint into year-end on so many moving parts.

EM QE can be done w/ limits, u just need good PR & Indo can take a lesson from RBI🙇🏻‍♀️