ING Bank NV strategist Viraj Patel with some comments
Patel notes that China's reported evaluation of the potential impact of a yuan devaluation is an "interesting ploy" and an indication of the full extent of its policy options.
"It seems as if Beijing is showing their hand in this trade war and showing the full extent of policies they could deploy in response to Trump's protectionist policy rampage", he says.
He argues that the market implications of a yuan devaluation policy approach will be the opposite to an approach if China were to dump US Treasuries - which would have fueled USD weakness but kept the yuan staying firm (as highlighted last week here).
Adding to that, he says that a yuan devaluation policy approach will weigh on global risk sentiment as it would escalate trade tensions to a currency war, resulting in higher risk aversion - which would be a negative for EM FX asset classes.
He also argues that other Asian countries will also copy Beijing's weaker FX policy approach in response to a more "protectionist White House" - in which he expects EM Asia FX to move lower, particulary trade-sensitive currencies like KRW and TWD.
Interestingly - as Patel pointed out - China's move here comes at a time when the US Treasury is set to release its semi-annual FX report on currency manipulation (reportedly at the end of this month). In the prior report in October last year, the US chose to keep China on its "Monitoring List" - alongside Japan, Korea, Germany, and Switzerland.
