Forecasting the Low in the 10-Year T-Note Yield Using the Chinese Yuan.

1. Forecasting the Low in the 10-Year T-Note Yield
The Yuan led by 30 days the decline in the 10-year T-Note yield from its peak in
late November 2015 to its low on February 14, 2016. The 30 day lead changed
to a coincident indicator to the 10-year yield in late April to early July 2016. The
current level of CNY to the dollar of 6.70 equals its weakest intraday low in mid
January 2016 and the weakest point in late 2010.
The weak Yuan is due to a weak world economy, negative interest rates in a
large number of major countries, and Brexit. All of these factors combined to
drive the U.S. 10-year T-Note yield to a low of 1.36%. With the Yuan at its
weakest point in July 2016, equal to intraday weakest points in January 2016
and late 2010, interest rate yields are expected to reach a low in coming weeks,
given the Yuan remains stronger than 6.70 (see chart).

2. Chinese Central Bank Controls Yuan
China’s Yuan weakened to its lowest level in six years in July 2016, equal to the
intraday low in January and the level in late 2010. The Central Bank of China sets
a reference rate for the Yuan each day against a basket of currencies and allows it
to trade 2% above or below that point.
Still, its core exchange-rate maneuvering remains driven by the Dollar. When the
Dollar declines, the Chinese Central Bank tends to keep the Yuan largely flat or
even slightly stronger against the U.S. Dollar, while it weakens against the basket
of 13 currencies. But when the dollar advances, the Central Bank takes the
opportunity to guide the Yuan weaker against it, which enhances life for Chinese
exporters, while limiting its depreciation against the basket.

3. Chinese Yuan (CNY) Benefits from Brexit
The Brexit vote on June 23 created uncertainty in global markets, increasing the
Dollars value as other major currencies fell. That helped the Chinese Yuan to
depreciate without the panic and capital outflows that accompanied previous
devaluations.
The Central Bank of China, which controls the value of the CNY by setting a
daily trading range, has allowed the CNY to weaken 1.6% in the two weeks since
the UK referendum. The Yuan was Asia’s worst performing currency in that time,
and compares with a 1.9% decline vs. the Dollar in the first week of January
2016, and a 3% depreciation over a two-day period in August 2015.

4. The Chinese Yuan (CNY) reached 6.70 in July 2016, equal to its intraday weakest level of 6.70 in January
2016 and 6.70 in late 2010 (see chart).

5. Given the CNY Weakest Level of 6.70, Bank
Stocks (KBW) are expected to Bottom Out at 60
The weakening of CNY from November 2015 to January 2016 forecast the peak
in bank stocks (KBW Index) in December 2015 and its decline to mid-February
2016. The strengthening of the Yuan from its February 2016 low to March/April
peaks forecast the recovery in the KBW index. The subsequent weakening of
the Yuan (CNY) from 6.46 in March/April 2016 to 6.70 today caused, along with
Brexit, the decline in the KBW from over 70 to 60 in June.
A low, or weakest point, in the CNY of 6.70 would forecast a low in bank stocks
in coming weeks above 60 on the KBW, as the yield on the 10-year T-note
reaches a low.

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