China starts devaluing CNY

I have no doubts that this is a game changer. As you know I have been short CNY (and AUD) since I believe the authorities cannot stomach the deflation associated with capital flows (for instance here). The FT quotes a Chinese official,

The era of yuan appreciation has come to an end with China’s move to lower the daily reference rate by 1.9 percent, said Yu Yongding, a member of China’s monetary policy committee when the currency was revalued in July 2005. The yuan exchange rate will enter “a period of stabilization or even depreciation,” said Yu, now a researcher with the Chinese Academy of Social Sciences. The People’s Bank of China’s reduction to the daily fixing was a “symbol” for the change, although signs of yuan depreciation were evident before Tuesday’s move, he said.

This is quite direct for a central banker. Now that the AUD bulls have taken comfort with the RBA stating the AUD is fairly valued, Australia’s terms of trade are set to deteriorate further…

(short CNY, short AUD)

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