Reactions from 15 major banks to the new PBOC yuan fixing procedure.
SocGen: The domino effect to weaker commodity prices and weaker currencies across EM and resource exporters will be hard to stop. We still like being short NZD and CAD in G10 though the bigger moves will be in EM, and along with the dollar, the biggest winner may be sterling, since the UK case for higher rates is perhaps the clearest in G10 at the moment.
Credit Agricole:On a broader level, the devaluation signals PBOC's eagerness to join the global currency wars. With the competitive devaluation by various central banks gaining momentum but global trade slowing, the latest CNY devaluation could be seen as likely to force other central banks to consider similar measures before long. Yet another consideration here should be the impact of the PBOC actions on the capital outflows from China. If the outflows were to intensify after the CNY tumble, the erosion of central bank's FX reserves should continue and add to concerns about insufficient future sovereign demand for global assets. In turn this should continue to boost risk premia in the global bond and stock markets. One currency that so far has successfully weathered the storm has been JPY. We doubt that JPY could decouple from the selloff in Asia FX for too long, however. The CNY devaluation comes on the back of disappointing trade data out of China (Japan's main trading partner) and highlights that the external conditions for Japanese exporters could deteriorate further. All this adds to the list of BoJ's worries that already includes the stubbornly low Japanese inflation and casts doubt over the bank's ability to achieve its 2% target anytime soon. We subsequently see risks for USD/JPY on the upside from here.
BofA Merrill: Today's events won't likely impact the incoming data before the September FOMC meeting. Instead, we think that the Fed will need to make a risk assessment: is the greater uncertainty after the Chinese yuan depreciation enough to warrant postponing liftoff? The FOMC also has the option to slow the pace of subsequent hikes, should downside risks be realized. Fed officials will need to weigh these risks against the realized cumulative improvement in the US labor market.The Fed call is now closer than before, but it may take a significant reaction by global markets for the FOMC to stay on.
NAB: This threatens our current AUD/USD forecast that currently has 0.74 for end September, 0.72 for year end and a low of around 0.71 in H1 2015. At the same time, our AUD/USD forecasts for the remainder of this year are heavily conditioned on whether the Fed makes its first move on rate following the September 16/17 FOMC meeting, and if so whether the US dollar necessarily appreciates on the back of that. We think there is still some USD dollar upside on a September move (the NAB call) and so risk to our current AUD/USD forecasts lie to the downside.
Deutsche Bank: The devaluation of the RMB poses four headwinds for the metals. 1) China accounts for 45 - 50% of global metals demand, so the obvious impact is a weaker RMB makes commodities more expensive to import. The immediate impact will be that the arbitrage between domestic and imported commodities closes up, discouraging imports in favour of domestic supply in commodities such as coking coal and zinc. 2) Most commodities are in balance or over-supplied, with prices being set by the marginal cost of production. Weaker producer currencies will result in lower costs, and lead to lower prices. 3) China is a growing exporter of its overcapacity, particularly in metals such as aluminium, steel and stainless steel, a weaker RMB simply improves the competitiveness of exports. 4) Tighter monetary/financial conditions may dampen the demand recovery.
Morgan Stanley: Now, as China has moved the CNY fixing overnight, markets may have to price in a higher risk premium of potential capital outflows. The best way to trade this 'risk premium' is by shorting AxJ FX, in our view...Without economic support, China's FX move will likely have deflationary implications globally. First, the higher USDCNY would increase commodity import prices for China, which may dampen demand. Second, China will export its products at cheaper prices, regaining market share from its competitors, suggesting lower profit margins and slower activity of its trading partners, while China's profits and activity should rise. Third, should China need to increase its FX presence to control RMB volatility, its FX reserves would decline more rapidly, which could push global funding costs higher as China may have to liquidate some of its international bond holdings.
Credit Suisse: We think the RmB will end up depreciating a little more than the forward curve is currently anticipating (the 12-month forward rate is at RmB6.50, or c.3% downside) because: i) there has been a strong correlation between RmB strength and weakness in Chinese nominal GDP growth; ii) there is acute PPI deflation and China has net foreign assets of 44% of GDP; iii) FX intervention has hitherto offset much of the stimulatory impact of RRR/rate cuts; iv) a small devaluation could accelerate capital outflows, thus placing further pressure on the currency; v) the IMF also believes the RMB is no longer 'undervalued.'Market implications: This is negative for commodities (though much of the financing may have unwound).
BNPP: There will be intense focus on today's PBoC fixing to assess the impact of new market forces. The sharply higher fix will bolster expectations for further CNY depreciation. BNP Paribas positioning analysis signals short AUD positioning is very light and we see scope for further AUD weakness.
BTMU: The new fixing mechanism should allow the renminbi to be more market driven although of course the Chinese authorities can still suppress the USD/CNY rate onshore. The USD/CNY rate may now come under more upward pressure ahead of the first Fed rate hike than would previously have been the case prior to today's change in the fix mechanism, and given our forecast for further broad-based US dollar strength. Our analysts in Hong Kong have stated that they are likely to revise up modestly their forecasts for USD/CNY heading into year-end. However, they remain comfortable with their view that the renminbi will resume its longer-term appreciation trend once the Fed has started to raise interest rates. Speculation has heightened as well that the Chinese authorities will make further policy announcements such as widening the daily trading band.
ANZ: The broader impacts of such a move are likely to be substantial and wide-ranging. For the region we expect almost all asset prices to be affected to some degree. And even globally one can envisage impacts on such things as Fed policy (via the USD), global bond yields and commodity prices. The most obvious and keenly felt impacts would likely be on volatility and Asian currencies. The effects here could well be permanent. For those substantially exposed to the impacts of a de-anchored RMB, therefore, either directly or through the likely myriad impacts on other financial markets, we recommend that increasing weight be given to this prospect in both corporate risk management and investment decisions.
Barclays: Altogether, while the move by the PBoC highlights the risks to the US outlook, they do not, at present, alter our view. We retain our call for a September hike, but believe the probability has fallen somewhat as the move may raise concerns in the mind of the FOMC about global growth and inflation pressures. If so, the committee could choose to defer rate hikes past September.
UBS: We think it unlikely that the Chinese government will let only market momentum drive the RMB exchange rate from now on, as that can be quite destabilizing. We think the government may still want to take a relatively cautious approach on the exchange rate front. The upcoming SDR review is one consideration, and avoiding destabilizing depreciation expectations and capital outflows would be a more important one. In this context, how China sets its daily fixing and manages FX market flows in the next few days will be very telling. Nevertheless, we do see today's move an important change in China's way of managing the exchange rate. Given prevailing market pressures led by expected Fed rate normalization, the RMB's significant appreciation against other major currencies in the recent past, China's disappointing export performance, and mounting deflationary pressures, we think today's move signals a new government willingness to let the CNY slide more against the USD than previously. We now expect USDCNY trading at about 6.5 by end 2015E instead of 6.3 as previously envisaged, and 6.6 at end 2016E.
RBS: Why has China acted now? Because Japan has collapsed the value of the yen and then Europe collapsed the value of the EUR. Hence, in real effective exchange rate (REER) terms the value of the CNY has surged at a time when exports are very weak, growth is rapidly slowing and deflation pressures are building. Against the Japanese yen more specifically, the CNY has risen spectacularly over the last couple of years: From 12 to 20+ without pausing for breath. Having had Japanese and European deflation 'exported' to it, China must now seek to export some of its own deflation problem somewhere else. The currency wars just intensified rather profoundly. We will likely still see periods of USD/CNY stability as the authorities allow the proverbial dust to settle. For other Asian regional currencies this is a vulnerable moment. Already weakening steadily against the USD, the lingering veneer of regional FX stability brought by renminbi stability to the USD is now almost totally tarnished. Expect Asian regional currencies to weaken more quickly from here. This brings its own difficulties given the extent to which Asia, notably at the household and enterprise level, borrowed dollars with such gusto and in such vast quantities into/through the Fed QE years.
HSBC: The People's Bank of China announced an important change as to how the onshore USD-CNY fixing rate would be determined. While China's policy makers have long suggested that FX reforms would happen, the abrupt nature of today's announcement has injected considerable volatility into the RMB and other Asian currencies. Importantly, the change in the fixing mechanism should not be read as a sign that China's authorities are purposely adopting a CNY devaluation strategy. In our view they have sufficient policy ammunition to boost domestic demand to offset external headwinds. We forecast another 25bps policy rate cut and 200bps reserve ratio cut in 2H 2015. Today's change in the USD-CNY fixing mechanism will not impede RMB internationalisation efforts.
SEB: Going forward, the idea is to let markets to have more influence over the yuan. The new arrangement means that the daily fixing (around which the USD/CNY is allowed to fluctuate +/-2% per day) will be based on market makers' quotes compared to the current method of a black-box calculation by the PBoC. A freer pricing of the yuan is necessary for it to be included in the IMF's SDR basket and eventually reach the status as a global reserve currency. It is also intended to boost exports and thus support both growth and employment. We have raised our forecast for USD/CNY to 6.40 at year end (previously 6.20).