SINGAPORE — China’s surprise devaluation of the yuan couldn’t have come at a worse time for some Asian currencies.
A measure of the region’s 10 most-traded currencies excluding the yen is set to decline for a third year, its longest losing streak since 1997, amid signs the US will raise interest rates for the first time in a decade.
The People’s Bank of China’s cut its reference rate by a record 1.9% on Tuesday, triggering a global rout, and lowered it by 1.6% on Wednesday. Vietnam widened the dong’s daily trading band.
“This is like a double whammy with China allowing its currency to weaken,” said Wee-Ming Ting, the head of Asian fixed income in Singapore at Pictet Asset Management Ltd, which oversees $19 billion of emerging-market debt. “It will start a vicious cycle by different countries trying to depreciate their currencies.”
The yuan has been a source of currency stability in Asia during past crises and Chinese authorities propped it up earlier this year to deter capital outflows and make a case for official reserve status at the International Monetary Fund. China’s policy shift to support exporters and stem the deepest economic slowdown since 1990 heightens the risk of competitive currency devaluations as global demand wanes.
The Bloomberg-JP Morgan Asia Dollar Index fell 0.9% on Wednesday after dropping 1.6% Tuesday. The yuan was headed for its biggest two-day drop in 21 years after the PBOC cut its reference rate to the weakest level since 2012.
Currency rout
The onshore yuan weakened as much as 1.7% to 6.4301 a dollar in Shanghai following Tuesday’s 1.8% decline, its biggest one-day loss in two decades. The central bank lowered its daily fixing by 1.6% to 6.3306, a 0.1% discount to the previous closing level of 6.3231. The yuan sank 2.2% in Hong Kong’s offshore trading.
The PBOC said Wednesday there’s no economic basis for the currency to keep devaluing, highlighting the nation’s current-account surplus and $3.65 trillion of foreign-exchange reserves.
The baht sank to 35.4146 at 12pm on Wednesday after sliding 0.35% on the previous day.
South Korea’s won declined 1.3% to 1,194.70 as of 1.34pm in Seoul, the lowest since 2011, and Taiwan’s dollar slid 0.4% to NT$32.20. Indonesia’s rupiah dropped 1.6% to 13,825, while the Philippine peso dropped 0.8% to 46.285. Malaysia’s ringgit sank to 4.0275, the lowest since 1998, and Singapore’s dollar slid to a five-year low of S$1.4155.
‘Negative impact’
The State Bank of Vietnam widened the dong’s daily trading band as China’s currency devaluation “will have a negative impact on the Vietnamese economy,” the central bank said in the statement. The dong will be allowed to trade as much as 2% on either side of the central bank’s fixing, the same as the yuan, and up from 1% previously. The move follows two devaluations of the dong this year, by 1% each, in January and May.
Though the PBOC called Tuesday’s change a one-time adjustment, foreign-exchange traders are pricing in more weakness in Asian currencies. Australia & New Zealand Banking Group is reviewing its year-end estimates for Asian currencies as the lender’s forecasts have already been reached.
“The market was caught off-guard by China’s move,” said Khoon Goh, a Singapore-based senior foreign-exchange strategist at ANZ. “We’re going to see ongoing volatility in the near term as the market tries to digest what happened. We need to see whether after the one-time devaluation the Chinese authorities are going to allow the currency to continue to depreciate.”
China exposure
The currencies of South Korea, Taiwan and Singapore are the most vulnerable to a decline in the yuan as their exporters have the highest exposure to China in Asia, according to Barclays Plc, Standard Chartered Plc and Mizuho Bank Ltd.
Policy makers in Taiwan and South Korea are struggling to revive their economies amid a slump in overseas sales. Singapore on Tuesday slashed the upper end of its 2015 growth forecast as its export-dependent economy has been hurt by slowing growth in China, while uneven recoveries in the US. and Europe have damped demand for Asian goods.
The yuan’s devaluation is adding to the woes of Malaysia’s ringgit, which was Asia’s worst performer this year even before the PBOC’s move. China was Malaysia’s largest trading partner in 2014. The ringgit has slumped 13% in 2015 as the oil-exporting nation grappled with weak crude prices and a political scandal involving Prime Minister Najib Razak. Indonesia’s rupiah has declined 10.5%.
Market Contagion
As the region’s worst performing currencies, the ringgit and rupiah would be affected more, according Tim Condon, Singapore-based head of Asia research at ING Groep NV. “I think the contagion will hit them the hardest.”
A report on Saturday showed Chinese exports shrank 8.3% in July, compared with a Bloomberg survey’s median estimate of a 1.5% contraction. The yuan’s real effective exchange rate, a measure adjusted for inflation and trade with other nations, climbed 13% over the last four quarters and was the highest among 32 major currencies tracked by Bank for International Settlements indexes.
The currency moves “are a fairly reasonable reflection of people’s concerns about the currency-policy shift,” said Simon Derrick, the chief currency strategist at Bank of New York Mellon Corp in London. “If we are going back to that kind of world, a world we’ve not been in for several years, then its entirely understandable people will themselves want to go for keeping their currencies competitively priced. It’s the race to the bottom argument.”
