The Chinese Yuan Is Quietly Depreciating Again, And What It Means For Stocks by Bryce Coward, CFA
The Chinese yuan has been out of the limelight for the past several months as the depreciation trend that has prevailed since 2014 took a post-Brexit pause. The pause, however, has been rather short lived as over the past few weeks the yuan has quietly moved from about 6.60 per USD to just shy of its 6.70 low hit back in July (chart 1). While it may not seem like a big deal, a breaching of the 6.70 level could have drastic implications for stocks over the coming months. Chart 2 below overlays the level of the yuan per USD (red line, right axis) on the relative performance of counter cyclical stocks vs cyclical stocks (blue line, left axis). When the yuan falls against the USD, counter cyclical stocks outperform cyclical stocks by a wide margin. Based on the level of the yuan, the recent outperformance of cyclicals vs counter cyclicals appears to be a bit out of sync. A new low on the yuan could thus trigger another wave of counter cyclical outperformance just as folks were getting comfortable with their newfound love for cyclicals.