The Chinese yuan went from hated to loved rather quickly. The move lower (Yuan getting stronger) has been accelerating as we see the Chinese currency put in the biggest weekly gain since July 2005! Recent dovish Fed rhetoric as well as the trade talks “progressing well” has boosted the risk on sentiment.

Interesting to note is that the one-month risk reversal in the Yuan now trades in negative territory, i.e. traders expressing views via options are now “bullish” the Yuan. It surely is a fast world out there.

Several people are referring to the stronger Yuan as a headwind for the Chinese equity markets. Trying to figure out where the Chinese equity markets are heading by staring at the Yuan is pretty much impossible. The below chart shows SHCOMP index (orange and yes some don’t think this is the accurate index) versus the Yuan (white). Not much causality in that chart.

When it comes to the high-profile meetings between the US and China, practically the only thing noteworthy that has come out is China’s commitment to buy more US energy, agricultural and manufactured goods. Nothing really WOW in our view, but let’s await the magical March 1.

For the Chinese equity markets to take off we need to get people to come back and speculate. Below chart shows the SHCOMP (orange) versus the outstanding balance of margin purchase and debt repayment (white).

Don’t overthink the Chinese markets. Speculation has so far been the only driver of equity markets.

Source: charts by Bloomberg