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4 Feb 2015
CNY devaluation the biggest tail-risk in 2015 – BAML
FXStreet (Barcelona) - Analysts at BofA-Merrill Lynch explain that the recent FX war has weighed on China by appreciation of the CNY on a TWI basis, as such CNY devaluation is the biggest tail-risk in 2015 as it could send global rates to a fresh low.
Key Quotes
“In case of China that is already witnessing a slowdown in domestic demand, there are growing concerns that the strong CNY will weigh further on the economy. As a result, many investors have been exiting short USD/CNY positions lately and USD/CNY has traded up to the high of the start of 2014.”
“Our central scenario is that Beijing will resist the temptation of resorting to a large one-off CNY devaluation in 2015, like was the case during the Asian currency crisis in 1997. Our China team had made the case that a significant CNY”
“The fact that a sharp decline in commodity prices has kept imports flat while exports have been picking up in recent months (so that the trade surplus has been widening) should also argue against a one-off devaluation in the immediate future. That said, if deflation risk grows further and the EUR and JPY continue to fall, this could alter Beijing’s calculations.”
“While a meaningful CNY devaluation is not our central scenario, we view it as a major tail-risk for the global economy. To the extent that a CNY devaluation would reduce China’s purchasing power for commodities, such an event would be very negative for the already battered commodity sector.”
“At the same time, a large CNY devaluation could lead to competitive devaluation pressures across China’s main trading partners , especially in Asia. For these reasons, we believe a CNY devaluation would likely send global rates to fresh lows.”
Key Quotes
“In case of China that is already witnessing a slowdown in domestic demand, there are growing concerns that the strong CNY will weigh further on the economy. As a result, many investors have been exiting short USD/CNY positions lately and USD/CNY has traded up to the high of the start of 2014.”
“Our central scenario is that Beijing will resist the temptation of resorting to a large one-off CNY devaluation in 2015, like was the case during the Asian currency crisis in 1997. Our China team had made the case that a significant CNY”
“The fact that a sharp decline in commodity prices has kept imports flat while exports have been picking up in recent months (so that the trade surplus has been widening) should also argue against a one-off devaluation in the immediate future. That said, if deflation risk grows further and the EUR and JPY continue to fall, this could alter Beijing’s calculations.”
“While a meaningful CNY devaluation is not our central scenario, we view it as a major tail-risk for the global economy. To the extent that a CNY devaluation would reduce China’s purchasing power for commodities, such an event would be very negative for the already battered commodity sector.”
“At the same time, a large CNY devaluation could lead to competitive devaluation pressures across China’s main trading partners , especially in Asia. For these reasons, we believe a CNY devaluation would likely send global rates to fresh lows.”