China's 5y Credit Default Swap (CDS) is appraoching a key technical level. This level around ~50 (highlighted in red) acted as resistance between 2004 and 2007, until it broke out. That level then acted as support and to date, has failed to move back below.
There are a few headwinds China faces that I'm keeping an eye on and that could send the CDS price higher:
1) Australia (a major trading partner with China) has a lot of economic problems right now and this is showing up in AUD/USD and Copper prices.
2) Trump's tariffs.
3) Global growth weakening and hence demand for China's products.
Kyle Bass of Hayman Capital has done some great research on China and I reccomend looking into his work.
The broad indicator that I'm watching is China's manufacturing PMI - which is below 50 and signalling economic contraction. Keep an eye on this for further weakness.
Ultimately, how does one express this view in the markets? Both fundamentally and technically, USD/CNH looks attractive from the long side.
7 has proven to be a key level and after a rally from the lows at ~6.25, we've consolidated the gains in what appears to be a bull flag. I've been waiting on a break of the 50 day moving average (pink line) which has acted as resistance. It also negated a potential bear flag and if you drill down to a shorter time frame, you can see this more clearly. This pattern is tradeable as it is from the long side but a move towards 7 gathers more confidence if we break 6.82. If this bull flag breaks to the upside and the prior highs are taken out, we could extend well beyond 7. Either way, risk is clearly defined and trading from the long side makes sense.
Good luck trading.
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