The People's Bank of China announced an effective 1.85% depreciation of its daily yuan fixing rate this morning, representing the largest one day move in history.
First, will we see a currency war? "This will renew the debate over FX wars, though the PBoC is at pains to say this is a one-off and it will continue to keep CNY 'basically stable'", wrote Bank of America Merrill Lynch's FX strategist Claudio Piron and chief China economist Xiaojia Zhi.
In a statement, the People's Bank of China said the yuan was getting expensive next to other emerging markets and commodities currencies. "Its comment that the CNY's strength relative to Asia FX gives room for an adjustment is an admission that CNY strength is taking its toll and will keep the market on alert," wrote Merrill. As a result, the bank expects the Australian dollar, the New Zealand dollar, the Korean won, new Taiwan dollar, the Singapore Dollar and the Malaysian ringgit to be "most negatively impacted."
Second, people may want to move their money out of China now that yuan is cheaper (no longer a good store of value). To stem to the rise of "FX outflows" and "cap USD/CNY drain liquidity", the People's Bank of China may cut banks' reserve ratios to ease liquidity conditions. In other words, more monetary easing?
Third, the People's Bank of China's move today means it is "still on track" for the yuan to become SDR reserve currency at the IMF. The central bank said it would increase yuan flexibility and decide the yuan midpoint based on "the closing rate of the inter-bank foreign exchange market on the previous day." Moreover, trading hours will be extended. "We believe this new mechanism, if followed through, marks a revolutionary move towards improving the CNY exchange rate formation mechanism," wrote Barclays.
Asian currencies fell today. The Australian dollar dropped 1.3% against the greenback, the New Zealand dollar fell 1%, the Korean won fell 1.5%, the Malaysian ringgit was down 0.9%, the Singaporean dollar fell 1.2%. But the new Taiwan dollars was down only 0.1%.
Month-to-date, the iShares MSCI South Korea Capped ETF ( EWY) fell 1.2%, the iShares MSCI Singapore ETF ( EWS) dropped 0.9%, the iShares MSCI Malaysia ETF ( EWM) retreated 7.7%, the iShares MSCI Australia ETF ( EWA) was down 1.3% and the iShares MSCI New Zealand Capped ETF ( ENZL) dropped 0.3%.
(END) Dow Jones Newswires
August 11, 2015 01:19 ET (05:19 GMT)
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