Slithering CNY: Be Careful of the Snake
Illustration: CNY devaluation in 1994 has been almost fully retraced … Any more benefit to gain from CNY strength?
Asianmacro had been travelling recently and have not had the time to muse much. But all of us must have been inundated with the debates and focus on ”Abenomics” with its impact on JPY weakening as a ”cure-all” and ”end-it-all” for Japan. The subsequent debate has not switched to potential global currency wars where ”beggar-thy-neighbour” currency devaluation may make a policy tool comeback.
The question that we should be asking ourselves now must be what will be China’s response. Having retraced almost fully all the CNY devaluation against the USD in 1994, if China decides to just let CNY hang around current levels or at a much slow pace of appreciation (and God forbids, horror-of-horrors, CNY depreciation instead). We might just about to see all the Asian countries counter in weakening their currencies in tandem.
All the massive inflows into Asian fixed income and other assets in mostly currency unhedged form will be in for a nasty shock when a 2-4% coupon in Asian ”safe haven” instruments is far outweigh by a potential Asian currencies depreciation stance from here in concert with CNY should China just decide to rest its currency adjustment embarked since 2005.
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