BArich Taiwan- If one country’s price-setting adjustment is another’s competitive devaluation, then Asia could be facing a round of currency wars following China’s sharp devaluation of the renminbi.

Markets across the region were enjoying the August lull on Tuesday when they were shaken by the shift, which sent the US dollar jumping against currencies from the South Korean won to the Singapore dollar.

 “Other Asian countries will see today as a competitive devaluation from China,” said Bert Gochet, analyst at JPMorgan.

The ripples around the region were also a sign of the rising impact of China’s markets on the rest of Asia — an effect only likely to increase if China continues to open its capital account.

“The more market is allowed to play a part in China, the more sensitive Asian currencies will be to moves there,” said Mitul Kotecha, head of Asia currency and rates strategy at Barclays. “In the past both China’s equity and forex markets have had only a limited impact.”

The People’s Bank of China said the renminbi’s 1.9 per cent weakening — its biggest single move — was a one-off adjustment to reflect a new, more markets-led price-setting process.

Analysts said the key for gauging the long-term impact of Tuesday’s move will come from watching how much further China allows the renminbi to fall.

Although China’s exporting rivals experienced a fillip as their own currencies fell, the risk is that future falls will not match further weakness in the renminbi, putting them at a relative disadvantage unless they take action themselves, perhaps by lowering interest rates.

China’s real effective exchange rate against other currencies has risen about 18 per cent over the past year, according to Barclays, meaning Tuesday’s move could be read as an attempt to catch up with weakness elsewhere rather than a declaration of an exchange rate battle.

“Given we believe that China is not aiming to engineer a much weaker renminbi, the sharp depreciation pressure on Asian currencies from the fixing change should fade,” said Paul Mackel, head of emerging markets currency strategy at HSBC.

“That said, we believe the likelihood of the renminbi trading with elevated volatility [against the dollar] implies that other dollar-Asian exchange rates should be more volatile too.”

While exporting nations such as Taiwan and South Korea typically prefer weaker currencies to boost the price competitiveness of their overseas shipments, they also mistrust sudden sharp market moves that can trigger other problems.

“The stability in the renminbi over the past few months, in the face of a stronger dollar, had helped to serve as somewhat of an anchor for the region’s currencies. With today’s move, this is clearly no longer the case,” said Khoon Goh, senior forex strategist at ANZ.

Other Asian countries will see today as a competitive devaluation from China

The renminbi has barely budged against the dollar this year while currencies from the euro to the Australian dollar have dropped as investors have priced in an interest rate rise by the US Federal Reserve. The euro has weakened 10 per cent and the Aussie almost as much in the year to date.

On Tuesday the South Korean won and the Singapore dollar fell 1.3 per cent each to Won1,178.94 and S$1.399, respectively. With Taiwan, whose dollar fell 1.4 per cent to T$32.086, the three are seen as the most likely to act if Tuesday’s move was in fact the starting gun for a sustained round of further currency weakening.

 

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