While Hunt believes that such a change could happen, “unless and until that Narrative shifts, the path forward for the Fed just got much more perilous… the path forward for oil and any other global growth-sensitive asset or security just got much more perilous.”
Jan Dehn, head of research at Ashmore is one of those that remains convinced of the first view pointing out in a note that it is important to remember why China is implementing reforms, including a liberalisation of its currency regime, in the first place.
“The entire purpose of the reforms is to prepare the economy for RMB appreciation, i.e. a rise in the Yuan once QE across the Western world creates inflation and currency weakness in the QE countries.”
For Dehn, inflation is likely to begin in late 2016 in the US as, he says, “the drags on consumers’ willingness to respond to plentiful and cheap liquidity from household deleveraging, negative housing equity and unemployment ease.”
Dehn also points out that, fuelled by QE and an expectation, as far back as 2011, that the US will soon reach exit velocity, the US dollar has risen 40%, a jump that has knocked China, which is not yet ready for such a strong appreciation of its currency.
“China has therefore wisely concluded that it makes sense to float now. Better to float now, experience weakness – if that is what the market wants – and then, when the tide turns and the QE currencies go down due to inflation, the RMB can go up hard and fast, but from a lower starting point,” Dehn says.
But, he is quick to add, this does not mean that China has thrown the renminbi into the currency race to the bottom, rather he says: “China is not going to sacrifice its macroeconomic health in some massive global currency war that ultimately is self-defeating. China has its eyes on becoming a global reserve currency. The move to floating rates is consistent with its long term strategy.”
Phillip Saunders manager of the Investec Diversified Growth Fund agrees that China’s overriding priority is ensuring the health of its domestic recovery and, he says, if push comes to shove that will take precedence over the broader economic liberalisation policy. But, he adds, in some respects the same can be said for the US.
Just as the Chinese government’s primary focus is what is best for China, so the US has, as its over-riding priority, the sustainability of the US recovery he said.
Adding: “We remain of the view that the US will raise rates either in September or in the meeting following that. While it is clear that expectations of future inflation have moderated, they do need to raise rates, primarily because the labour market is progressively tightening,” he said.
There is, of course, every possibility that China’s growth is not as strong as its government would have people believe, that its recent moves are an indication of increasing desperation. But, if there is one thing that can be said with certainty of markets over the past few years, it is that central bankers continue to rule the roost. And, despite the conventional wisdom, especially when it comes to an unconventional market like China, market participants would do well to remember that.
