Rupiah on a ramp and the Yuan outlook

Indonesian Rupiah

USDIDR 1m NDF moved to 13757 from 13880 on the back of comments from Bank Indonesia's Hendarsah, who said the central bank would allow the rupiah to strengthen further. A similar explanation was offered up last year. Still, the central bank is having a more significant effect this time around as the Yuan, Asia's key bellwether currency gauge is shifting on a stronger tack.

There have been several broken sentiment barometers to gauge trade risk this past year. Still, the one that has yet to fail is the level of the Yuan. The USDCNH is the most defining trade risk sentiment tool in the markets/ And even as far currency markets are concerned, both EM and G-10, all currency paths cross the PBoC even more so with the Fed on hold. 

The Yuan outlook

We enter 2020 amidst a backdrop of blue skies in the global manufacturing/tech cycles coming through and a thaw in the US-China trade tensions.

RMB NEER has weakened by 7% in the past 18 months, where most of that weakness was centered around the numerous trade escalation episodes when the effective tariff rate on total Chinese exports to the US rose from 3% to a threat of 21%. 

During the current trade truce, including 50% unwinding of September 19 tariffs, the effective tariff rate eases by only 1.5%. None the less, this decline should translate into relief for the RMB where most market models, have it pegged exactly where the PBoC has centered the reference rate midpoint. That itself is very reassuring and provides traders something definitive to work with while suggesting the PBoC are at the top of their game on their policy settings.

Although I suggested all paths lead through the PBoC, the Fed's policy direction will also be a key impetus to the USD/RMB outlook. If global manufacturing activity continues to improve or dollar weakens amidst sustained weakness in US economic activity, then USDCNY will also drift lower. In addition, a Fed policy pivot would suggest a move to 1.1500 on the Euro, and given the sensitivity of the CNY to the EUR the USDCNH will then decline to 6.80 

But for risk sentiment in general absent a Fed pivot, the Phase one deal ensures a more stable Yuan this year, which is excellent for Asia risk, but there will be a downside skew to 6.80 if phase 2 talks progress well. This would be excellent of global risk  as the P1  deal suggest  the RMB will not be a source of EMFX weakness this year and should be a boost to global equity markets.