China Moves to Devalue Yuan, US Dollar Bounces

The Aussie plunged 1 per cent to 73.39 US cents as of 11 am in Tokyo, while the New Zealand currency weakened 0.9 per cent to 65.58 US cents.

The People’s Bank of China (PBoC) set its daily reference rate for the yuan at 6.2298 to US$1, compared with 6.1162 yuan the previous day, effectively 1.86 per cent lower.

China devalued the yuan on Tuesday in what its central bank called a “one-off depreciation” of nearly 2 percent as its economy grows at its slowest pace in decades, guiding the currency to its lowest point in almost three years.

The opening-up of the foreign exchange market, extending trading hours, introducing qualified foreign institutions and promoting the formation of a single exchange rate in both onshore and offshore markets will continue to be targeted by the central bank.

The U.S. dollar lurched higher on Tuesday as China allowed its yuan to fall to levels last seen in 2012, a shift that could provide a competitive boost to exports for the world’s second-largest economy.

The move came amid speculation China is preparing to widen the trading band for the yuan for the first time since March, 2014.

A weaker yuan might help Chinese exporters and prompt complaints by foreign manufacturers. The central bank said it would now base the yuan’s midpoint on market makers’ quotes and the previous day’s closing price. “It surely marks the end of the presumed SDR-driven stability and highlights that the July export numbers were just too weak to ignore”, said Sean Callow, senior currency strategist at Westpac in Sydney.

The Australian dollar was collateral damage as investors bought the greenback.

The market often uses the Aussie as a liquid proxy to hedge against weakness, or wager on strength, in China.

As the U.S. dollar gained amid the yuan’s slide, the euro was also nudged lower although it drew underlying support on optimism towards Greece sealing a multi billion-euro bailout deal with its lenders.

Athens and its global creditors could reach a bailout accord by Tuesday and keep the heavily-indebted country solvent. China’s overseas shipments fell 8.3 per cent from a year earlier in dollar terms in July, well below the estimate for a 1.5 per cent decline in a Bloomberg survey.

China manages the exchange rate through an official midpoint, from which it can vary 2 percent each day.