SUPERNEWS

Macro

Yuan Devaluation Looms, Traders Eye 10-20% FX Drop Amid Economy Woes

Speculation on China's yuan devaluation grows amid economic struggles, risking global currency stability with a potential 10-20% drop.

By Mackenzie Crow

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4/28, 21:28 EDT
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Key Takeaway

  • Financial markets speculate China might devalue the yuan to support its economy, a move not seen since 2015.
  • A yuan devaluation could boost exports but risks global currency market instability and capital outflows.
  • Wall Street banks predict the yuan will weaken by Q2, amidst debates on balancing economic recovery and financial stability.

Yuan Devaluation Debate Intensifies

Speculation is growing around China's potential drastic measure to support its struggling economy by devaluing the yuan. This controversial strategy, not utilized since the 2015 shock devaluation, aims to boost exports and allow for interest rate cuts. However, critics warn of a dangerous feedback loop of capital outflows and further declines in the yuan, risking global currency market stability. Bob Elliott of Unlimited Funds Inc. suggests a significant devaluation could be effective if followed by maintaining the new level, predicting a possible 10% to 20% drop in the yuan's value.

PBOC's Balancing Act

The People's Bank of China faces the challenge of stimulating economic recovery while preserving the yuan's appeal against a strengthening US dollar. The yuan's position near its weakest permissible level against the dollar and its relative strength in a global basket complicates China's export competitiveness. The PBOC's efforts to maintain currency stability are becoming increasingly difficult amidst rising greenback, capital outflows, and trade war fears with the US.

Global Implications and Market Reactions

A significant yuan depreciation could trigger a "true currency war," according to Brad Bechtel of Jefferies Financial Group Inc., potentially leading to a domino effect of currency devaluations in export-heavy economies. This scenario could force central banks in the region to intervene, raising interest rates at the cost of local growth. Meanwhile, market speculation about a yuan devaluation is evident in the surge of gold trading and Hong Kong stocks, as investors seek safer assets.

Street Views

  • Bob Elliott, Unlimited Funds Inc. (Neutral on China's economy):

    "A one time meaningful devaluation is a much more effective strategy... The optimal move would be a depreciation to a level where the currency looks cheap and then you hold the line."

  • Brad Bechtel, Jefferies Financial Group Inc. (Neutral on China's yuan policy):

    "They probably should — to boost exports, help deflation and help domestic growth... But I don’t think they will."

  • Simon White, Bloomberg Strategist (Neutral on yuan devaluation speculation):

    "Gold trading in China has exploded and stocks of copper have risen sharply prompting speculation that policymakers are on the brink of a yuan devaluation. Even though it’s still a tail-risk, it’s one requiring greater vigilance as the economy becomes increasingly deflationary, redoubling capital outflow pressures."

  • Edouard de Langlade, Macro Trader (Bearish on Chinese Yuan):

    "If you do have the reserves but are reluctant to deploy them, it shows weakness as well... For that reason, I decided to put on a substantial short yuan position again."