Chinese Yuan Devaluation

In a surprise move, the PBOC has stepped into the currency markets once again, devaluing the CNY. With the Japanese Yen’s recent weakness, Chinese policy makers had to act. Looking at the 10-year JPY/CNY chart, the last time the PBOC intervened to markedly devalue the currency was in 2015, when JPY breached 20 to the CNY; this was clearly a reactive move. Looking at real effective exchange rates across EM, the CNY screens as one of the most expensive currencies, and it was almost at its most expensive level once again. In 2015, it was widely believed that the PBOC’s move was a desperate attempt to boost exports to support a slowing economy. Sound familiar? The question is, what happens next? The 2015 PBOC devaluation triggered weakness across EM currencies. The same thing is likely to happen this time, though there is the caveat that many EM currencies have already weakened over the past couple of years. This is just another example of China policy makers looking at past playbooks for answers.