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Chinese Devaluation & Yen Strength

James Boston
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The Peoples Bank of China (PBoC) has begun the process of devaluing the Chinese Yuan in an effort to curtail speculative buying of the currency. The central bank held back it’s intervention efforts overnight and allowed the Yuan to slip almost 1% against a benchmark currency basket. Some commentators are even suggesting that the PBoC actively took steps to weaken the currency.

This completes the largest monthly drop since 2007 for the Chinese currency, with the Yuan giving up 1.6% during the month of February according to the China Foreign Exchange Trade System (CFETS). It is now widely expected that the Chinese central bank will widen the trading band for the Yuan. Currently the currency is permitted to move up to 1% from its Daily Reference Rate, it is anticipated that, subsequent to legislative approval, this range will be doubled to 2% in the coming months, although uncertainty remains around the timing.

The Chinese Yuan is gaining importance as a global currency, it has recently moved into 7th position as the most used payments currency in the world, displacing the Swiss Franc in the process. The move by the Chinese authorities to widen the trading bands, particularly on the downside, is being welcomed as the first step in the ‘internationalization’ of the Chinese currency.

Elsewhere in Asia, the Japanese Yen experienced strong buying over the past 24 hours. The Yen is considered as Asia’s safe haven currency and as such benefited strongly from investors taking flight from emerging market assets. After coming close to testing lows dating back to early November, the Yen has pulled back somewhat in early European trading this morning. A very clear Head & Shoulders pattern has formed on the 5 minute USDJPY chart, this implies that there is a strong probability of a 30 point break lower in the short run, if this comes to pass we should see USDJPY break key support which will technically clear the way for further Yen upside.

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