Intraday Update: Risks In China With The Yuan

Balance of payments

As I laid out in yesterday’s article (link), these tariffs on China create an environment that is highly unrealistic for China. Remember, China manages its currency in order to maintain its stance in the impossible trinity.

Technical Defintion: China manages its currency by maintaining a tightly controlled exchange rate (often pegged or managed float against the USD), which requires capital controls to retain monetary policy autonomy—this is a textbook case of navigating the impossible trinity, which states a country cannot simultaneously have a fixed exchange rate, free capital movement, and independent monetary policy. By restricting capital flows, China sacrifices financial openness to retain control over both its currency and domestic interest rates.

Notice that the spike in the dollar against the Yuan overlapped perfectly with the selling pressure in ES from the intraday highs:

This is likely connected to the timeline and information coming out of the White House. Traders are likely deleveraging now on a marginal basis because if this goes through, it’s a massive risk.

ES continues to remain ABOVE the lows from the gap risk on futures open:

And the VIX is back at the highs:

implied volatility premiums are at an extreme, indicating traders are paying a considerable premium to hedge right now:

While equities are moving from headline to headline, the long end of the curve continues to grind down. UB has made consecutive lows, a second day in a row:

This is causing the curve to bear steepen dramatically, which is taking pressure of the Fed to cut because long term nominal GDP expectations are rising. However, given the context of the tariffs, it is likely with a stagflationary tilt.

We are moving into CPI this week as the market prices a marginal degree of imbalance for inflation:

Notice the spread between the 2 year and 10-year inflation swap continues to grind down in a trend comparable to 2022. This shows short term inflation swaps ABOVE long-term inflation swaps.

The interaction of tariff risk with inflation and the long end of the curve is bringing equities to a point of ultimatum.

More on this after the close

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