The Chinese currency has gone from 7.17 to 6.41. As we outlined last autumn, the Yuan dynamics is a huge part of the inflation/yields puzzle. The entire Yuan story is giving us a strong deja vu of the Deutschmark status back in the days when it was the anchor of Europe.
With US 10 year printing new recent highs, let's remind ourselves of what we wrote last autumn;
"The rise in the Yuan is occurring at a time when US inventories are very low. There are 3 possible dynamics from the current Yuan/USD move;
1, US restocks...passing over the "cost" to Asian producers, resulting in Asian margins crushed (this has been the "trade" for the past decade or so)
2, US restocks....unable to pass on the "cost" to consumers big players such as Amazon etc take the hit from the Yuan appreciation affecting margins
3, US restocks...importers pass on the cost to the consumer...ultimately feeding over to inflation, with the yield curve steepening, value outperforming etc
The first scenario has been the "default" dynamic for a long time and it still seems what the market is pricing in as the main scenario. The question is whether the Yuan appreciation and the dollar break down feed over to one of the other scenarios unfolding, point 2 and 3. (h/t Gavekal).
First chart shows the US 10 year vs the Yuan (inverted). US 10 year is approaching some big resistance levels in the 1.25/1.3% area, but is something bigger brewing? There is "some" room to catch up to the Yuan.