In what is becoming both a monotonous, and to many, worrying development, China’s currency continued to weaken on Wednesday, falling to a fresh four-year low against the US dollar.
The People’s Bank of China fixed the USD/CNY rate at 6.5314, sharply weaker than the prior fix of 6.5169 and the 6.5157 level it closed on Tuesday.
A higher figure indicates that the renminbi has weakened against the US dollar.
Since the fixing, the USD/CNY has continued to weaken in early trade on Wednesday, currently sitting at 6.5451, the lowest level since April 2011.
The sharp devaluation, at odds with the bank’s recent rhetoric that it would allow market forces to play a larger role in determining its value, sent risk assets into a spin in the minutes following the announcement.
Stocks shuddered, commodities sank and currencies such as the Australian and New Zealand dollars – closely tied to the performance of the Chinese economy – skidded.
“Risk asset have been sold in the wake of the PBoC’s fix,” said IG Markets chief market strategist Chris Weston following the announcement.
“The market was expecting a stronger CNY given talk the Chinese powers that be were intervening in the FX and equity market yesterday. What we actually saw was the PBoC weaken the CNY mid-point by 145 pips to 6.5314. Naturally, any export competitor of China has seen a move lower in their markets on the back of this.”
Along with heaping pressure on those nations directly competing against China, the continued weakness in the currency suggests that capital outflows from within China are accelerating, raising fears that economic conditions within nations are continuing to deteriorate.
As a result of weak CNY fixing, the gap between onshore and offshore traded yuan ballooned to a record high, suggesting that investors outside of China believe there’s likely to be further substantial weakening in the renminbi in the period ahead.
Weston suggests this will likely weigh on risk assets further should it eventuate.