Important market news came out this weekend, and surprisingly (or perhaps not so) it has received little notice. I’m talking about the PBoC’s statement released Friday, signaling that they are looking to break the peg to the dollar and rebalance against a currency basket. Here’s the news, via The Financial Times:
China has paved the way for a further weakening of its currency by announcing changes in how it measures the renminbi’s value.
As markets gear up for next week’s Federal Reserve meeting, the People’s Bank of China signaled it would measure the level of the renminbi (or yuan) against a basket of currencies rather than just the US dollar.
The move, announced on Friday, has raised investors’ alarm at the prospect of a new currency war – just as the US prepares to raise interest rates.
Readers who follow us at Macro Ops knew that this change was coming. We have discussed at length China’s need to devalue the renminbi. The reasons being: the country is awash in debt, is facing deflationary pressures due to an increasing amount of non-performing loans, and has been getting killed due to its crawling peg to the appreciating dollar — while China’s export competitors are devaluing in what has the looks of a budding currency war. (Keep reading….)