FX CONCEPTS FX CONCEPTS

GLOBAL MACRO RESEARCH GLOBAL MACRO RESEARCH

CURRENCIES INTEREST RATES EQUITIES COMMODITIES
To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898; research@fx-concepts.com


MARKET INSIGHT REPORT
Go, PRC Style
By John R. Taylor, Jr.
Chief Investment Officer
_____________________________________________________________________________
Managing an economy where most of the pieces are under your control has some
interesting parallels with the game of go. Assuming you were the country manager, Xi
Jinping in the Peoples Republic of Chinas case, you control all the black pieces and
what looks like much of the board. All the regulations are set to help you dominate the
game and win more space for your country. However, this is an extremely difficult game
to win and your strategy must be impeccable to even have a chance of winning. Despite
your outstanding power position, two aspects are out of your control. The first are the
Communist Party and the people of the country, both of which you ostensibly control
but there are limits and you must watch for them as they are always capable of throwing
the board up in the air. The other is the rest of the world, not just other countries, as
they are but a minor player, placing very few white stones. The real competitors are the
physical laws of nature, luck, and the economic and social decisions made by others in
your Party hierarchy, within your administration, and within your country. Actually the
real game of managing the PRC is more like playing on a go board with an infinite grid,
without corners. But of course, the board has been inherited by Xi and in many ways the
toughest part of the game has already been played years ago. Just establishing a
position to start the whole process was extremely demanding, but that is in the past.
Many very formidable opponents have lost their lives are dead but newer ones, not
originally even perceived, appear for instance, the environment. We assume, correctly
I believe, that Xi Jinping uses the best information available and has his goal as the
preservation and expansion of the Chinese society, which is consistent with the power of
the Communist Party and Xi himself that is, the go territory under his control. The
problem with this is that even with perfect knowledge, luck and power, the results are
often foiled by the power of the outside world. In fact, we would argue they are always
foiled by the outside world. The Communist system and others, like Confucian and
Fascist systems that purport to have control over events and expect to drive their
policies in a certain way, fall down the same way - every time.

Bringing this down to the current stone played by Xi and his team, the authorities
announced early on Wednesday that the annual GDP growth rate was 7.5%, higher than
the 7.4% the global economists were expecting. This implied a growth rate of 8.2% for
the second quarter, a big improvement from 6.1% in the first quarter. These numbers
are being scrutinized and I use that word very loosely by the press, who are
somewhat skeptical but basically accepting of the numbers. Some data, like electricity
consumption imply a number about 2% to 3% below this, but this is quibbling. The
bigger issues are how the growth is divided and generated by the Xi team and whether
they are reaching the goals they must reach in order to keep the country moving
forward, both capturing new space and preventing some areas from getting surrounded
and killed (in a go sense). The parceling out of new social funds, financing of SOEs and
local authorities, and the creation of money to feed the system, as well as the treatment
of the non-controlled financial system (shadow banks, bonds, and equity markets) is an
ongoing concern, as funds supplied far outpace the growth received. The financial
system including bad loans, the tax structure, recognition of failed financial and
commercial projects, and the relations with the global financial world are an area that is
challenging Xi. Master of the go board or not, Xi cannot make this come out his way and
must fight to control the territory he has inherited at the 18th Party Congress.
FX CONCEPTS FX CONCEPTS
GLOBAL MACRO RESEARCH GLOBAL MACRO RESEARCH
CURRENCIES INTEREST RATES EQUITIES COMMODITIES
To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898; research@fx-concepts.com


CURRENCY - EUROPE Long-term View

Kiwi Is Following Aussie Lower
By Jonathan Clark, contributing columnist
_____________________________________________________________________________

In our commentary two days ago titled
Aussie, the Weaker Link, we argued
the two most likely times for a peak in
the Australian currency are the start of
July and the week of August 18. There
were signs the Aussie formed a spike
high two weeks ago, but it had yet to
make a convincing break to the
downside. When we wrote this
commentary the New Zealand dollar
was not showing any signs of
weakness, but it shares cycles with the
Aussie so it could be peaking as well.
In January and again in June the
Aussie bottomed ahead of the Kiwi by a
week to two weeks and these lows were followed by significant upmoves. This sign that
the AUD is currently showing leadership increases the odds that the NZD would follow it
again, this time moving lower. Since the cycle was probably turning down, the Kiwi was
more vulnerable to negative news, and the market received some that it took quite badly.

The announcement that did the trick concerned the results of the recent
GlobalDairyTrade auction, where the average price of dairy products dropped nearly 9%
from the auction two weeks earlier. Prices had dropped 26% from the February high
before this news, with very little impact, but this further 9% could be the straw that
breaks the camels back. Inflation was lower too, perhaps slowing the RBNZ down.
Although it has been the most hawkish of the major central banks, consumer prices in
Q2 are now only 1.6% higher than a year earlier, lower than economists (and the RBNZ)
expected and well lower than the official cash rate (OCR) of 3.25%. It has been the
prospect of further rate increases by the central bank that has supported the Kiwi. The
OCR has hiked three times in increments of !% since March 13. We believe there will
be a delay in hiking rates at the July 24 meeting and that will undermine the currency for
a week.

The cycles argue the New Zealand dollar will decline into the second half next
week at a minimum and probably for another week (as we expect the RBNZ to
pause) before a medium-term low is reached. Our initial target for this low is the red
box at the .8600 to .8620 area. Following this low expected by the second half of the
week of July 28, the Kiwi should recover for two weeks or so as it attempts to resume its
uptrend before attempting a further downmove. A close below .8600 will signal a major
top has been seen. If our negative outlook for the next two weeks is correct the NZD
must hold below the resistance at .8770, but, if the .8620 level holds, the odds favor this
level being broken later in August.