Yuan slips to three-year low after PBOC devaluation

The Chinese yuan sharply weakened to a three-year low on Tuesday after the country’s central bank surprisingly devalued it, dragging down the Australian dollar and adding a potential element of volatility to the region’s foreign exchange markets.

In an attempt to make the country’s exports more competitive and prop up the economy after recent poor data, China’s central bank devalued the yuan by nearly 2 percent on Tuesday.

The yuan midpoint was set at 6.2298 per dollar, compared with the 6.1162 mid-point on Monday, with the central bank to now base the yuan’s midpoint on market makers’ quotes and the previous day’s closing price. Spot yuan plunged roughly 2 percent to as low as 6.3360, weakest since September 2012.

“The yuan had become relatively expensive as other Asian currencies weakened against the dollar. With fears of an economic slowdown mounting, devaluating the yuan was the only thing China had not tried after implementing monetary, fiscal and equity-boosting policies,” said Masafumi Yamamoto, senior strategist at Monex in Tokyo.

“Devaluation of the yuan likely won’t end here. Currencies like the Singapore dollar, South Korean won and Taiwan dollar, which stand to compete with China, are falling, and today’s move could generate headlines heralding the start of a devaluation war,” he said.

The Chinese central bank currently allows the yuan to move 2 percent on either side of its fixed mid-point.

“I’d say it’s a welcome, rather overdue move towards a market-determined exchange rate. It surely marks the end of the presumed SDR-driven stability and highlights that the July export numbers were just too weak to ignore,” said Sean Callow, senior currency strategist at Westpac in Sydney.

The Australian dollar lost 1 percent to $0.7338 AUD=D4, giving up earlier gains made on a rebound in commodity prices. The Aussie is often used as a liquid proxy of China trades.

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