It's overdone
On a trade-weighted basis, the yuan has been too strong for the past few months. China has been using its FX reserves to bolster the yuan and keep it in-line with the US dollar while the euro and everything else dive.
The market is freaked out because headlines are screaming about the largest devaluation in 20 years. Still, it's a 2% move. That's not a game-changer. If it hits 10%, then it changes things.
That doesn't mean it's over
The yuan fixing at 9:15 pm ET is the highlight of the day. The market is going to freak out when the band is moved another 1 to 1.5% higher so we could see a repeat of yesterday. That might set off more outflows (and more devaluation).
But a 1.5% move today is just the PBOC reflecting the market (the yuan finished 1.5% lower today).
The ultimate takeway for me remains that China won't tolerate slower growth and that means more rate cuts and stimulus are coming. Ultimately, that's good news for AUD.
So once again it's a question of timing. I think it's still too soon to fight the momentum but eventually that will be the right trade.
