PBOC's Decision Vital to Next AUD/USD, USD/JPY Moves
- PBOC devalues Chinese Yuan in biggest move in two decades.
- See the August forex seasonality report.
The People's Bank of China's decision to loosen the USDCNY trading band last night will have far-reaching implications. Look no further than the fact that the PBOC released an explanation of its monetary policy decision in English: the PBOC is well-aware the world is watching Chinese economic and financial markets, and is doing all that it can to maintain control over a spiraling situation.
The good news for the world is that a weaker Chinese currency may actually help growth. In April 2013, ANZ Research published a report showing that a +1% rise in the CNYJPY exchange rate resulted in a -0.19% slowdown in global exports. A cursory review of the same information today suggests that the inverse situation here would apply: a weaker Chinese Yuan relative to the Japanese Yen should be good for global growth.
This may be the first reverberating impact in FX from the PBOC's decision: how will the BoJ respond in kind. One of our long-held theses has been that the PBOC and BoJ have been engaged in a dangerous game of chicken, and that these 'FX war games' bode poorly for all parties involved.
Now that the BoJ sees that Japan's largest trading partner is effectively taking on a protectionist policy (weakening their currency to increase the appeal of Chinese goods to foreign buyers), the BoJ may be more inclined to act itself. Inflation readings continue to disappoint out of Japan, and next week's Q2'15 Japanese GDP figure is forecasting a recession. The PBOC may just have created the opportunity for the BoJ to stir up support for another round of easing; viewed through this perspective, the fundamental underpinning of USDJPY favors further gains.
--- Written by Christopher Vecchio, Currency Strategist
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