With the yuan plunging at an unprecedented rate in the past month, questions have emerged why the 2018 market response to China’s apparent devaluation is so different to what happened in 2015. Or, as Bank of America writes, comparing the years in terms of Chinese astrology, “what’s the difference between dog and goat?”

It’s answer: the economy.

As BofA explains, during Year of the Goat we experienced two episodes in which Renminbi depreciation led to material sell-offs in risk assets. The first was in August 2015, when the Chinese currency depreciated 3.2% in a matter of days, which was the leading indicator of a ~11% decline in US equities. Then, in the second episode, at the beginning of 2016, a 1.6% drop in the Renminbi prompted a ~6% decline in equities.

Fast forward today, when during the Year of the Dog, “we have seen the Renminbi depreciate much more – nearly 6% since mid-June 2018 – and equities are actually up nearly 1% over the same period.” Here BofA recalls that the common theme between 2015 and into the first part of 2016 was that financial markets were consumed by recession fears, as economic data was deteriorating and commodity prices – including oil – plummeted. Ultimately, this was resolved by the Shanghai Accord, which ushered in the latest credit binge in China, which in turn stabilized the global economy and put recession fears to rest while unleashing an unprecedented rebound in global markets.

There was another key factor back in 2015/2016: back then there was little cushion from economic growth, and considering that China is the biggest consumer of major commodities globally, no wonder markets reacted negatively at the time over Renminbi depreciation.

This is because commodities are traded in USD, and with a weaker Chinese currency, commodity prices in local currency increase, leading to declining demand and lower commodity prices in USD. Hence Chinese currency depreciation is highly deflationary via commodities.

As a result, the world reacted with panic to China’s currency depreciation which is highly deflationary via the commodity price channel.

This is the other notable difference between “then and now” today the US economy appears very strong, leaving much more cushion to offset any deflationary impact of a lower Renminbi, BofA’s economists claim.

Goldman echoes BofA’s sentiment, and in a note released overnight, the bank with the new CEO writes that “markets keep shrugging off trade tensions, both in aggregate and across sectors” and notes:

In addition to improving growth sentiment, the resilience of market sentiment to the rising trade tensions between the US and China likely reflects their limited impact on both the hard and survey data; a backdrop that has left our global economists comfortable with their current growth forecasts.

Unless, of course, that is merely the latest narrative that is set for oblivion: after all what was until a few months ago a “global coordinated recovery”, has since turned into “decoupling” where the US remains the only economy growing above trend, with both the EU and China suffering from a recent decelerating. And as many economists will attest, the only reason US growth remains solid, is due to the Trump’s fiscal stimulus, which however is set for a painful reversal in just about a year as Goldman recently observed.

This, coupled with growing concerns about the flattening yield curve, is the reason why the topic of a recession in 2020 (or even 2019) has become so dominant.

It is also the reason why BofA concludes that, “as usual, this is the kind of story financial markets do not pay attention to until they do.

The bank ends by invoking the most dangerous words in all of finance: “keep monitoring, but so far it is different this time” and will be at least until the Yuan slides another few percent and the selloff in what has turned into the world’s most important currency pair becomes indescriminate, coupled with a burst in capital outflows and “the ghost of 2015” makes a full return.

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