China’s move has raised the risk of a “currency war” as export rivals seek a weaker exchange rate to stay competitive, according to Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia.
“It’s hard to believe this will be a one-off adjustment,” Roach said. “In a weak global economy, it will take a lot more than a 1.9 percent devaluation to jump-start sagging Chinese exports. That raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous.”The devaluation caused oil prices to dip on fears that the Chinese economy is slowing, while the American stock markets fell on expectations that the value of the Dollar will strengthen. I suspect part of the reason driving China's decision was the news that the American consumer is tapped out.
Zero Hedge opines:
Almost exactly seven months ago, on January 15, the Swiss National Bank shocked the world when it admitted defeat in a long-standing war to keep the Swiss Franc artificially weak, and after a desperate 3 year-long gamble, which included loading up the SNB's balance sheet with enough EUR-denominated garbage to almost equal the Swiss GDP, it finally gave up and on one cold, shocking January morning the EURCHF imploded, crushing countless carry-trade surfers.(See also this short piece wondering if the coming currency war will lead to a repeat of the 1997 Asian crises).
Fast forward to the morning of August 11 when in a virtually identical stunner, the PBOC itself admitted defeat in the currency battle, only unlike the SNB, the Chinese central bank had struggled to keep the Yuan propped up, at the cost of nearly $1 billion in daily foreign reserve outflows, which as this website noted first months ago, also included the dumping of a record amount of US government treasurys.
And with global trade crashing, Chinese exports tumbling, and China having nothing to show for its USD peg besides a propped and manipulated stock "market" which has become the laughing stock around the globe, at the cost of even more reserve outflows, it no longer made any sense for China to avoid the currency wars and so, first thing this morning China admitted that, as Market News summarized, the "PBOC lost Battle Over Yuan."
That's only part of the story though, because as MNI also adds, the real, global currency war is only just starting.
And now that China is openly exporting deflation, and is eager to risk massive capital outflows, the global currency war just entered its final phase, one where the global race to the bottom is every central bank's stated goal. Well, except for one: the Federal Reserve. We give Yellen a few months (especially if she indeed does hike rates) before the US too is back to ZIRP, maybe NIRP and certainly monetizing even more things that are not nailed down.