USDCNH: Yuan, Yuan, YuanAnalysts have been asking if China will allow the Yuan to weaken for ages, and now it's starting, everyone's gone quiet...
Why is China's currency weakening now?
One explanation is yield differentials. Once upon a time, you could invest in Chinese bonds and earn a lovely premium vs US yields for doing so. That isn't the case now 👇
Chinese yields have gradually fallen, while US yields have risen sharply:
Now, this could all wash out. Dollar strength is being driven by the Federal Reserve's hawkish tones and high inflation in the US.
Bostic is already worrying about global growth and talking up the need to be "cautious".
If some of the 2022 Fed voters start to talk up those same concerns, maybe the markets begin to scale back those hike expectations, and weaken the dollar.
But that's only one side of the equation...
Back in 2015, the PBoC devalued the Yuan by 3%. Which if you look at it on the chart wasn't that big a deal...
It was a controversial decision however...
The move was unexpected
, and many believed it was a desperate attempt by China to boost exports in support of an economy that was growing at its slowest rate in decades.
However, the PBOC claimed that the devaluation was part of its reforms to move toward a more market-oriented economy.
The sudden shift sent a signal, and the yuan hasn't revisited the 6.20 level since.
And things don't really look too different now. China's economy is slowing, while global growth/demand is slowing too.
And for all the big promises of "common prosperity" or boosting domestic demand, nothing has really changed.
Back in August 2019, growth concerns were front and centre. The yuan was far weaker than it is now, trading above 7 per dollar. A weaker yuan was seen as a positive development for the Chinese economy by making their products cheaper for foreign buyers.
It might not be so abrupt, but there are plenty of reasons for the Chinese authorities not to push back too vigorously against a weaker Yuan.
