This analyst thinks Chinese authorities are letting the currency float so it will fall further

Following on from yesterday’s 1.85% devaluation of the yuan fixing rate, China’s central bank has let the currency weaken a further 1.6% today by setting the reference rate at 6.33.

Chris Weston, IG’s Melbourne-based chief market strategist, believes this “is very significant as it shows they have moved to a new mechanism for how the market plays a role in the CNY – almost a floating currency.

“Given the spot market closed yesterday at 6.3250 they have allowed the new ‘fix’ to move above the prior spot price. This is confirmation from the market that the PBOC have shifted and traders will play a bigger role in the RMB,” Weston wrote.

That is a very different take to the one the Central Bank’s chief economist, writing in the People’s Daily, put on it this morning. He said China was not about to embark on a devaluation trend.

A huge two day move, on a monthly chart ( -USDCNY monthly 12082015)

But Weston’s view is a take the Peterson Institute’s Nicolas Lardy has sympathy with. Even though he believes the Chinese moves are unlikely to “usher in another chapter of currency manipulation to support Chinese exports and thus its economic growth”, he does agree that there has been a regime shift and a “major step toward a more market-determined exchange rate”.

“Put simply the market is worried that China is moving to a more market dictated (even floating) currency,” Weston said. “With the RMB at all-time highs (when looking at it on a real effective rate) it is around 10% over valued. So the RMB should weaken further.”

That’s important and Weston makes a key linkage for Australia and Japan.

“If the market continues to push the RMB lower then it creates less purchasing power for Chinese importers, (then) any asset/company leveraged to the Chinese consumer/importer would be taking a hit now.

AUDUSD has taken a hit and it’s interesting the JPY has weakened too. What the market is saying here is that is you export to China you may well have to go one step further to weaken your own currency.”

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