by BCA Research
Since early 2015, the USD/CNY exchange rate has been an excellent leading indicator of global equity performance. A stable/appreciating renminbi has been positive for stocks, and vice versa. In fact, the August 11 devaluation forewarned the late-August plunge in the MSCI All-Country World Index (ACWI). Looking closer at the correlation is revealing: the PBOC front-run the Fed that was slated to raise rates in September, but the FOMC backpedaled, erring on the side of caution, owing to rising global financial stress. Nevertheless, the data-dependent Fed acted on December 16 and soon after that the Chinese allowed their currency to drift lower anew. January was a brutal month for global equity returns, as the fresh renminbi drop rekindled anxiety over the Chinese/emerging markets (EM) slowdown, and reignited fears of competitive devaluations across the EM.