The Chinese yuan (CNY) appears to have been stable over the last couple of months, giving the impression that capital outflows have stabilised. But while the Chinese dragon seems to be asleep, there is more going on than meets the eye. The side effects of government intervention are increasingly apparent in the Hong Kong dollar (HKD) market, which offers an interesting way for investors to seek to protect against the risk of another round of market stress stemming from potential CNY depreciation.
With global monetary policy tightening, what will smaller central banks do now? Most didn't have a choice but to keep rates low to avoid excessive currency appreciation, and some had to resort to quantitative easing (like Sweden) or currency floors (like Switzerland and the Czech Republic). The Swiss floor gave in under pressure in early 2015, so the big question is now whether the Czech Republic might also depart from its currency floor?
Since Trump's election in November, financial markets have focused on the reflation trade. Inflation expectations and bond yields have risen, as have equities and commodities. Although the US dollar has strengthened by a little over 3% on a trade-weighted basis, this masks the individual currency winners and losers.