The recent changes in China’s inverted interest-rate swap curve show that people are becoming more confident about the economy. The five-year swap rate is now higher than the one-year rate, ending a previous trend where the five-year rate was discounted by 15 basis points back in February.

Growing Optimism About Economic Recovery

Experts believe this change reflects hope that supply-side reforms will help pull China out of deflation in the next 12 to 24 months. While rate cuts are expected in the short term, the long-term outlook appears brighter. Furthermore, the shift in the swap curve could mean that market expectations for China’s recovery are beginning to change. Recently, the People’s Bank of China set the USD/CNY central rate at 7.1460, which is better than the expected 7.1635. The adjustment in China’s interest-rate swap curve signals that it might be time to act. We see an opportunity to take advantage of a steeper curve by considering trades that benefit when long-term rates rise faster than short-term rates. This suggests that the market is starting to expect a future economic recovery. Recent data supports this optimism. The Caixin Manufacturing PMI rose to 51.7 in May, marking the fastest growth in almost two years and surpassing expectations. This strong data indicates that government support for the property sector and other stimulus efforts are starting to take effect. Thus, we should view the current market sentiment as more than mere speculation.

Focusing On Long Term Opportunities

As Liu suggests, we need to look beyond any upcoming rate cuts and focus on the long-term picture. We are exploring call options on Chinese equity indices, as the CSI 300 has already increased by over 15% from earlier lows this year. The changing market sentiment indicates that there is still potential for more growth in equities. Zhaopeng notes that the curve may continue to steepen, alongside the central bank’s guidance on the currency. The stronger-than-expected Yuan fixing shows an official desire for stability, reinforcing our positive economic outlook. Therefore, we are also considering strategies to invest in the Yuan against the dollar. Create your live VT Markets account and start trading now.

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