ChartBrief #6 CNY VS JPY REER

This ChartBrief looks at the REER (Real Effective Exchange Rate – from the BIS) for China and Japan. You probably have two questions; why these two countries, and what are REERs?  First is China has seen its REER down 7% so far this year, and Japan up 18% YTD.  When you see this type of movement you begin to get interested (I do).  The reason is on the charts they seem to look like a trend change on both counts.

As to the second question, what’s a REER?  BIS says: “Nominal EERs are calculated as geometric weighted averages of bilateral exchange rates. Real EERs are the same weighted averages of bilateral exchange rates adjusted by relative consumer prices.”  i.e. they are basically trade weighted currency indexes.  As an analytical tool they can be used to assess whether a currency is looking stretched vs its longer term trend (for trending currencies) or vs its long term average (for mean reverting currencies).  As they are trade-weighted they provide a useful cheat sheet as to whether a currency is moving in a way as to make that country’s exports more competitive (a lower REER) or less competitive (a higher REER).  Also as to whether its inflation outcomes are being pushed up (by a weaker currency) or pushed down (by a stronger currency).  Thus if the above chart does represent a trend change it would imply economic out-performance by China in terms of higher inflation outcomes and more competitive exports relative to Japan.  Something to think about, and a trend to keep an eye on.

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Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.