I feel that the immediate reaction to the surprise PBOC’s move was somewhat overdone. If you look at it from a broader perspective, the adjustment should yield a favourable assessment in the context of greater liberalisation of the FX markets.
Admittedly, the timing of the move stroked suspicions, especially among certain US politicians. As our Chief Strategist, Chris Weston, cheekily asked “What will Donald Trump say?”
The fact of the matter is that the Chinese government has held CNY steady for a little more than eight months this year, while appreciating substantially against other currencies. Even after the lower CNY fixing, the yuan is just 3% lower than the greenback on the year, with only the Taiwanese dollar and Indian rupee ‘performing’ better.
In contrast, the Malaysian ringgit and Indonesian rupiah stumbled 13% and 10% respectively, versus the USD. The dollar index appreciated 7% on a year-to-date basis, primarily due to expectations surrounding imminent Fed Fund rate increase. In such a simplified context, it would hardly be fair to suggest that China is going to be engaging in a competitive devaluation.
In hindsight, the market has probably realised that, which explained the calmer sentiments today. Additionally, verbal intervention from the Chinese central bank also helped cushion the renminbi. Bloomberg noted that PBOC assistant governor Zhang Xiaohui claimed there is no basis for depreciation to persist while Deputy Governor Yi Gang stressed that the monetary authority will act if volatility becomes excessive.
To be clear, we still expect further depreciation in the yuan down the road. According to the PBOC, the yuan is still 17% overvalued. This means that significant market pressures still exist and the absence of aggressive defending from the PBOC would allow the downward force to come through. Needless to say, the central bank would be vigilant in smoothing out wild swings in the FX markets and help stabilise expectations for the currency. But it has to be said that intervention should not change the direction of the move, just the slope.
Therefore, PBOC should continue to abide by its new reference rate mechanism, which could suggest lower fixings in the coming days.
One key implication of China’s latest move is the possibility that the Fed may be forced to delay its rate hike. This stems from the belief that if China exports deflation globally via cheaper Chinese products, achieving the inflation targets would be more difficult. While the market appeared to take this into account, the implied probability of a September rate hike has gone back to 48%, which is the percentage pre-PBOC move.
After all that is said and done, policy-makers are probably sitting on their hands to see how the yuan development will play out before deciding if a response is necessary. Should fresh deflationary pressure permeates through the global economy, we cannot rule out further easing from the ECB,BOJ, and postponement of Fed, and BOE rate hike agenda, in order to reach their inflation goals.
Singapore stocks rebound while SGD sinks
Singapore Blue Chips are reaping the benefits of a calmer sentiment, and rebounded strongly. The Straits Times Index (STI) posted over 1% early on and held on to the gains for most of Thursday. However, the STI struggled to regain the 3100 handle, or erased the 92-point tumble on Wednesday.
What I fear is that the recovery is merely a short-covering exercise, or at best a hunt for bargains. The rebound is across the board, led by banks and telcos after yesterday’s hard-hitting session. The STI remained firmly on a slippery slope and is already down nearly 8% on the year. Only Taiex and Jakarta Composite fared worse in Asia.
SGD is under massive pressure on two fronts. While the stronger dollar tone is already unfavourable for the Sing dollar, speculations that Singapore may ease policy after China’s devaluation spur investors to sell SGD.
The MAS said in a statement yesterday that it stands ready to temper excessive volatility in the local currency. Furthermore, some analysts are seeing increasing risk that MAS will adjust policy at its next meeting in October. SGD may see more weakness in the coming sessions.