Asian currencies, which have been sent on a downward spiral by China’s devaluation, can only be stabilised by government intervention in the renminbi, say market observers.
Beijing’s currency moves over the past two days have affected regional currencies as the renminbi has been allowed to fall further.
Yesterday the People’s Bank of China (PBoC) set the renminbi’s daily fixing rate at Rmb6.3306, close to the previous day’s closing price of Rmb6.325.
The market priced in further depreciation, with the onshore spot rate dropping as much as 1.98% to reach its daily trading band limit; however, it rebounded quickly in the final 30 minutes of trading yesterday and closed down 0.96%. Market participants speculated that Chinese authorities intervened in the market to stem the losses.
China's action has significantly affected equity, bond and currency markets. Export and commodity-sensitive currencies like the New Taiwan dollar, Korean won and Malaysian ringgit have depreciated against the US dollar by 2.2%-2.4% over the past two days.
“I do not see China wanting to see a 2% drop in its currency every day; I think they will try to limit the pace of depreciation,” said Mitul Kotecha, Singapore-based head of Asia FX and rates strategy at Barclays. “There’s a chance they want to limit the move (i.e. intervene)… it is moving too quickly.”
Eddie Cheung, Hong Kong-based Asia FX strategist at Standard Chartered, anticipated government intervention: “We believe the PBoC will step in to curb excessive volatility if it feels that the market is becoming too one-sided in driving USD-CNY higher. The government has the tools to ensure stability, including selling reserves and boosting inflows via capital account liberalisation. It can also cut the reserve requirement ratio.”
Arthur Lau, Hong Kong-based head of Asia ex-Japan fixed income at PineBridge Investments, said the renminbi could depreciate a further 3-4% in the near term, but the downside was limited. “If you look at the G10 currencies, they have depreciated 10% against the dollar on average in the past 12 months. If the renminbi continues to move like a G10 currency, it is probably the range that we will look at.
“I do not expect a structural depreciation policy shift from the PBoC, [but] in the next couple days, volatility will remain very high.”
However, “the prevailing bearish sentiment may present a sizeable depreciation bias for the RMB in the near term,” said Aidan Yao, senior emerging market economist at Axa Investment Managers.
Most economists, fund managers and FX strategists did not see the PBoC’s move as an attempt to fuel a “currency war”, where countries explicitly weaken their exchange rates in order to stimulate export and economic growth. Nevertheless, it has created instability in Asia’s currency markets.
Kotecha said Asian currencies have been falling too fast, but it was difficult to see any stabilisation unless the renminbi itself stabilised. “I think it all relies on the renminbi,” he said.
Lau, like most other managers, is not convinced it was a desire for a currency war which triggered the PBoC policy changes; more a desire to bring the RMB into line with the global market as a further step towards integration into the IMF's special drawing rights (SDR) currency basket.
“The renminbi was performing very well against other Asian currencies and even G10 currencies over the past 12 months - the depreciation now is much less than other currencie,” Lau said.
The renminbi has moved to a more market-driven mechanism which created pressure on other currencies, especially commodity-sensitive currencies, because the new daily fixing mechanism reflected a softening of China demand and brought the currency rate more in line with market equilibrium prices, Lau said. “That’s why it is too early to declare a currency war.”