While the decline in the currency has been relatively small so far, it’s been enough to concern global investors and affect Mexico’s stock market and peso, Finance Minister Luis Videgaray said Thursday as the country spent $400 million under a program to support its exchange rate.
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Japan’s Nikkei N225, which is in its worst start of year in 20 years, fell 1 percent to a three-month low and is likely to post its biggest weekly fall since March 2011.
The uncertainty on China led traders to sell the Australian dollar, which is seen as a proxy for Chinese growth, pushing it to its lowest since September versus the greenback and the yen AUD= AUDJPY=.
US stocks that rely on Chinese consumers were especially hammered.
Foreign exchange reserves decreased about USD108 billion to 3.33 trillion in December, the People’s Bank of China said Thursday.
“The world’s worry spotlight has now gone on to China”, said Bancorp Treasury Services’ Peter Cavanaugh. Growth concerns about China are nothing new – they have been with us for nearly three years now.
The yen rose to its highest against the dollar in more than four months on Thursday as investors looked for a haven after China guided the yuan aggressively lower, fuelling fresh anxiety about its economy and its policy intentions. Chinese officials are clearly under pressure domestically and internationally. But as an impoverished communist nation, the Chinese authorities had the iron-fisted power to mandate the devaluation.
The Japanese yen continued to gain momentum on safe haven trades and the reverse in the USA dollar after the release of FOMC minutes on Wednesday.
“We have an overall negative view of most Asian currencies, except the Hong Kong dollar which is pegged and the Malaysian ringgit which is too cheap”, Heng said.
The communists in the old days could administratively solve their competiveness problem by mandating a currency devaluation.
The PBOC pointed to the fundamentals of China’s economy as a long-term factor that will prop up the yuan. But China’s recovery since the 2008 Great Recession has been powered by a massive monetary expansion. But under the current risk-off sentiment and volatility triggered by developments in China, “central banks need to think about” the impact that such action has over currencies, which complicates the situation, he said. At least a third of all large Chinese borrowers and about half of the Chinese provinces are now seriously insolvent. By the end of 2017, Goldman expects the dollar to buy 7.30 yuan, up from 6.80 yuan.
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While the yuan got some respite on Friday after the PBOC’s higher guidance fix and reports it was intervening in the spot market, China was expected to continue allowing the yuan to weaken in the longer term in a bid to help its exporters and remain competitive against its regional rivals, among other incentives.
