The PBoC’s overnight move to weaken its national currency, the RMB (Chinese Yuan), shows a significant shift in policy. They confirm they are to play a greater role going forward in the management of the exchange rate, sending ripples through the foreign exchange market.
The move certainly comes at an opportune time for them following a series of weak macro trade data out of the country recently; exports have tumbled 8.3% in July from a year earlier and there has been a severe slow down in the economy with the decrease in demand from the world’s biggest economy having knock-on effects throughout the world.
The Yuan’s fix to the US dollar was cut by 1.9% to 6.228, the most on record. Every morning the PBoC fixes the currency at a certain point and usually only allows it to trade up to 1% each way from the mid-point.
We saw the Australian dollar (AUD), viewed as a proxy for Chinese growth immediately fall as much as 1.3% against the US Dollar to 0.7320; the New Zealand dollar (NZD) correspondingly falling 1.1%.
Basically there was US dollar strength across the board as the EURUSD & GBPUSD also both plummeted following the news but both have since recovered and are now actually sitting in positive territory for the session, now trading at 1.1030 & 1.5600 respectively.
Other instruments seeing a rollercoaster ride overnight were the dollar-denominated commodities, Crude Oil & Gold. For a product that has been pretty stagnant over the past month or so we’ve seen a wide trading range in Spot Gold overnight, hitting a low of 1093.77 and a high of 1119.35 all within 7 hours.
Equities have also obviously been affected; the FTSE, Dax & CAC all trading down around 1% and the massive mining company BHP Billiton were off 1.3% this morning.
Economists are debating if this move is the beginning of China entering the currency war or just a reaction to stabilize itself following the recent weak trade figures.
The PBoC have come out saying the move is a one-off and not the beginning of a trend but this is yet to be seen. The world is sceptical and all eyes will be peeled to see what they do in the coming days and weeks.