The drop in China’s yuan may not be over for a while.
After the People’s Bank of China devalued the yuan for a second straight day on Wednesday, some people are speculating that a further slide is in store, possibly resulting in a devaluation of as much as 10% against the dollar. The yuan USD/CNY, +0.9659% was down almost 2% at one point on Wednesday, but trimmed its losses after Beijing intervened to stop the tumble, according to The Wall Street Journal.
“China has signalled a significant shift in policy by re-enforcing yesterday’s action with further slippage today. The authorities have been in to smooth the process this morning and have verbally questioned the extent of the weakness so far, but that is little more than lip service,” Nick Lawson from Deutsche Bank said in a note.
“We estimate that the currency is overvalued by around 10% and given that the dollar has rallied 10-15% versus most [emerging-market currencies], 10% would seem to be a reasonable target for now,” he added.
The devaluation process has already triggered a series of currency depreciations elsewhere, he noted, which could quickly offset some of China’s gains in competitiveness.
The Deutsche Bank thinking is in line with a report from Reuters that notes China’s central bank remains under pressure to devalue the yuan further in coming months. People inside the government are pushing for a lower currency to help the struggling exporters, the news service said on Wednesday, citing sources involved in the policy-making process. The comments suggest there is pressure for the yuan to devalue almost 10%, it added.
The PBOC took markets by surprise early Tuesday, by devaluing the yuan 1.9% — the largest against the dollar in two decades — in a move to shift to a more market-driven exchange rate. But the decision is also being interpreted as a ploy to boost its sputtering economy and help faltering exports after a period of disappointing trade data and slow industrial production.
Analysts fear this is the opening salvo in a new currency war that could push the U.S. Federal Reserve to delay its first interest-rate hike in nearly a decade.
A weak currency makes Chinese goods more competitive, while international companies exporting to the world’s second-largest economy are at risk of being hurt because their products become more expensive to yuan-holders.
The Chinese forex moves have already roiled the global financial markets significantly, but it could get even worse as MarketWatch’s Barbara Kollmeyer points out.