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Yuan devaluation not aimed at waging currency war: Barclays

The devaluation of the yuan should not be seen as a sign of China wanting to wage a currency war, but it is more to do with China’s ambitions to facilitate yuan’s inclusion in Special Drawing Rights (SDR), says Dennis Tan, Fx Strategist, Barclays. He adds that it should be seen more as a liberalisation or a reform measure to improve he fixing mechanism so that it reflects the market rates.

Below is the verbatim transcript of Dennis Tan’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: What is the sense you are getting from China. Is this a currency war that China is waging or is it just a temporary move?

A: We do not think it’s a currency war. We think it is more in line with China’s ambition to facilitate the yuan’s inclusion in special drawing rights (SDR). So this should be more seen as liberalisation or a reform measure to improve the fixing mechanism so that flex the market rates. However, in today’s press conference the deputy Governor of People’s Bank of China (PBoC) mentioned that reports of 10 percent depreciation to support export is groundless and there were other strong comments to say that they do not see persistent depreciation. So these are hints that China is not trying to engage in a currency war.

Latha: That said, is there an expectation that there will be depreciation of the yuan simply because it is going to be more market determined?

A: Given the macro backdrop, we are in an environment where the Fed is about the hike interest rates and is going to be the first major Central Bank in the world to hike rates, that is helping to support the dollar and you have seen that most of the emerging market (EM) currencies of the world have already adjusted versus the dollar and now China seems to be the laggard in this global foreign exchange adjustment versus the dollar. So, there is still expectations of some depreciation of the yuan as market participants, as residents in China shift their assets towards more dollar-based assets and so there should be some further adjustment. Although, I think People’s Bank of China (PBoC) possibly slow the depreciation and not let this depreciation expectation get to entrench.

Latha: So, what do you see as the dollar-yuan rate say by September 30, and by December 31?

A: It is a very tough call. We do not have a definite forecast at this juncture given that there is such a huge amount of uncertainty as to how China would change its fixings on the daily basis, whether it will stick to what it said, which is to consider more the market rate. So, we are still trying to assess the impact of this liberalisation move on the foreign exchange on China. So, I think some modest and gradual depreciation in the Chinese yuan (CNY) is a fair expectation from here.

Sonia: It is interesting, the euro has seen a gain for the last six days as a lot of the carry trades have been unwound. Do you expect the euro appreciation to continue?

A: We do not think the euro’s appreciation can continue basically because the European Central bank (ECB) is maintaining a rather accommodative policy bias at this juncture. It has announced a fairly big quantitative easing (QE) programme and that they should follow through up to 2016. So, in the short-term, we do not even though the economy in the euro zone as a whole is holding steady, is modest, recovery in place, but we do not think that the euro can strengthen too far from here and also considering that the Fed is very likely to hike rates by the end of this year and likely to continue to hike rates into next year. So, that should support the dollar.

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