News analysis

Devaluation of yuan set to spark volatility

BEIJING • China's surprise devaluation of the yuan could not have come at a worse time for some Asian currencies.

A measure of the region's 10 most-traded currencies, excluding the yen, is set to decline for a third year, its longest losing streak since 1997, amid signs that the United States will raise interest rates for the first time in a decade.

The People's Bank of China (PBOC) cut its reference rate by a record 1.9 per cent on Tuesday, triggering a global rout, and lowered it by 1.6 per cent yesterday.

"This is like a double whammy with China allowing its currency to weaken," said Mr Wee Ming Ting, head of Asian fixed income at Pictet Asset Management Singapore. "It will start a vicious circle by different countries trying to depreciate their currencies."

The yuan has been a source of currency stability in Asia during past crises and the Chinese authorities propped it up earlier this year to deter capital outflows and make a case for official reserve status at the International Monetary Fund.

China's policy shift to support exporters and stem the deepest economic slowdown since 1990 heightens the risk of competitive currency devaluations as global demand wanes.

South Korea's won declined 1.3 per cent to 1,194.70 per US dollar as of 1.34 pm in Seoul, the lowest since 2011, and Taiwan's dollar slid 0.4 per cent to $32.20. Indonesia's rupiah dropped 1.4 per cent to 13,788, while the Philippine peso dropped 0.8 per cent to 46.285. Malaysia's ringgit sank to 4.0275, the lowest since 1998, and Singapore's dollar slid to a five-year low of $1.4155.

The State Bank of Vietnam widened the dong's daily trading band as China's currency devaluation "will have a negative impact on the Vietnamese economy", the central bank said in a statement. The dong will be allowed to trade as much as 2 per cent on either side of the central bank's fixing, the same as the yuan, and up from 1 per cent previously.

Though the PBOC called Tuesday's change a one-time adjustment, foreign-exchange traders are pricing in more weakness in Asian currencies. Australia & New Zealand Banking Group is reviewing its year-end estimates for Asian currencies as the lender's forecasts have already been reached.

"The market was caught off-guard by China's move," said Mr Khoon Goh, a Singapore-based senior foreign-exchange strategist at ANZ.

"We're going to see ongoing volatility in the near term as the market tries to digest what happened. We need to see whether, after the one-time devaluation, the Chinese authorities are going to allow the currency to continue to depreciate."


A version of this article appeared in the print edition of The Straits Times on August 13, 2015, with the headline 'Devaluation of yuan set to spark volatility'. Subscribe