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China in focus and of great interest – BAML

FXStreet (Guatemala) - Analysts at Bank of America Merrill Lynch noted events around China of which have been of great interest in markets of late.

Key Quotes

"China economic data have been closely watched by market participants, as investors try to explain changes in the data, and, more importantly, extrapolate the implications for asset prices. In this piece, we explore the long-term relationship between rates and economic activities. We summarize our conclusions below."

"1. The front-end of the curve (2y NDIRS) leads most economic activities (especially financing activities) by one to two quarters. Changes in front-end rates Granger cause changes in economic activities."

"This means when the PBOC eases, activity tends to recover with a one or two quarter lag, and vice versa. In contrast, the belly of the curve (5y NDIRS) does not seem to correlate closely with economic activities."

"2. The back-end of the curve (10y CGB) moves with the CPI in the same direction, but does not correlate strongly with other economic variables as most people have thought. Expectations on the front-end also matter to the back-end."

"3. The curve slope (2s5s) exhibits a strong positive correlation with economic activities, with no meaningful lead or lag. This suggests 2s5s NDIRS should continue to steepen alongside better growth momentum, which our economist predicts."

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