While the spotlight is on U.S. dollar ( USDOLLAR ) strength, Asian currencies are more of a danger to the plans of the Federal Reserve, according to Societe Generale strategist Albert Edwards.
The fallout could push the S&P 500 ( SP500 ) ( SPY ) below 2,200, the noted bear warned.
Edwards pointed out in March that the yen moves sharply when it breaks and predicted a draft down to 150. Dollar/yen now sits around 144. The yuan, at about 6.95 per dollar, has also seen significant weakening over the past six months.
"With all eyes fixed on US inflation and the Fed’s increasingly hawkish rhetoric, FX participants have been focused on the dollar’s rise, particularly against the euro," Edwards said in March. "Yet it is in Asia where FX has just gone wild. Aggressive BoJ relative easing has caused the yen to collapse through a multi-decade support level, reigniting fears of a re-run of events that led to the 2015 renminbi devaluation.”
"That is still 100% true today," he wrote in his latest note Thursday.
The PBOC could shake markets like 2015 with another devaluation, Edwards said.
The "Asian currency markets are getting set to unleash an Earnie Shavers knock-out punch onto the chin of an overconfident Fed," Edwards said and punch-drunk officials will hear "the air leaving the US equity market at high speed as it breaks below the March 2020 lows (S&P 2,200) and much to everybody’s surprise, carries on falling."
"The economic unravelling of China is receiving insufficient attention - maybe because of the focus on the European energy crisis," he added. "It is not just the freefall in the domestic property market and sky-high youth unemployment that the authorities have to contend with, but a well-telegrammed economic punch coming in the form of excess inventory accumulation now unwinding in the US."
"We warned back in March that China could not tolerate the yen in freefall pulling down other closely competing Asian currencies. Indeed, the spill-over effect of chronic yen weakness was the primary reasons for the shock 2015 Renminbi devaluation. The Korean won is now key."
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Fed, S&P face a one-two punch from the yen and yuan - SocGen's Edwards