FXStreet (Edinburgh) – Jane Foley, Senior Currency Strategist at Rabobank, assessed the recent decision by the PBoC.
Key Quotes
“While China may have taken another few steps to allowing the market to have a greater influence on the currency and thus comply with its promises to reform, the move in the CNY and the uncertainty related to the direction of the currency has already had a serious fall out around the world”.
“Stock markets are lower across the globe on the back of fears that the weaker CNY will mean less demand for imported goods in China and more competition from cheaper Chinese exports. Fears of weaker demand have also hit commodity prices for which China is a large consumer. Within the G10 universe, the AUD, NZD, NOK and CAD have been the weakest performing currencies since the start of the week due to their association with commodities. Within in the EM space, after the CNY the next weakest performers this week are the RUB, MYR and KRW”.
“One of the prime reasons for last year’s move higher in the China’s effective exchange rate was the CNY’s de facto USD peg. The USD has moved higher since the start of last year on anticipation of a Fed rate hike and the CNY has been dragged up. If there is a fresh currency war in the Asian region, the upward trend in the US effective exchange rate will likely find new momentum. The resultant tightening in monetary conditions in the US may give the Fed reason to delay its first hike. This strengthens our expectation that the Fed may not hike until December”.
(Market News Provided by FXstreet)