The document discusses how movements in China's Yuan exchange rate seem to forecast movements in the U.S. stock market, bond yields, and bank stocks. A weaker Yuan preceded falls in the S&P 500, rises in 10-year Treasury yields, and declines in bank stocks. A strengthening Yuan predicted rebounds in these markets. The recent strength of the Yuan suggests these markets may continue rising in early April, while a weakening Yuan could lead to declines in the second quarter of 2016.

1. China Yuan Fixing (CNY) Forecasts S&P 500 and
10-Year T-Note Yield
U.S. stocks slumped from highs in November and December 2015 to lows in early February 2016, after China’s
central bank unexpectedly weakened the reference rate used for managing the Yuan (6.32 in mid and late
October 2015 to 6.59 in early January 2016). The S&P 500 reached its low in February, about 30 days following
the weakest CNY level. The strengthening of CNY to 6.50 in mid February forecast a short-term market peak in
mid-March, followed by a flat to declining S&P. The recent strength in the CNY to 6.51 and prospect of stronger
levels below 6.50 sets the stage for a further rise in the S&P 500 in early April 2016. A failure to strengthen
below 6.50 and a weakening toward 6.60 forecasts a lower S&P 500 in the second quarter of 2016.

2. The yield on the U.S. 10 year T-note followed a similar path, peaking in December 2015, a month after
the strongest level of CNY. Yields fell from 2.3% to a low of 1.7%, following the previous drop in value
of CNY from 6.32 to 6.59 in early January 2015. The strengthening of the CNY from early January
from 6.59 to 6.50 in February forecast the low in yields at 1.7% and rise to 1.9% with further increases
likely. Yields on the 10 year T-note are expected to peak in early March 2016 and decline slightly. The
current strengthening of CNY from 6.55 to 6.51 with the prospect of 6.50 or lower forecasts a further
rise in yields by early April 2016. Conversely, a weakening CNY toward 6.60 forecasts lower yields in
the second quarter of 2016.

3. Bank stocks represented by the KBW Index followed the same pattern as S&P 500 and 10 year T-note yield.
Bank stocks are currently recovering due to the strength in the CNY in the first half of February. Bank stocks
should peak before mid March, but the strength in the CNY in early March 2016 forecasts further advances in
bank stocks in April 2016. Conversely, a weakening CNY toward 6.60 forecasts a decline in bank stocks in
the second quarter of 2016.
The purpose of this forecast with CNY is to understand the recent correction in stocks and bond yields.
The CNY seemingly forecasts the expected health of China’s and the world’s economy.