World stocks rebound as China soothes yuan weakness fears

“The central bank will frequently intervene in the foreign-exchange market in the next three months because it needs to ensure the yuan is stable”.

Although the PBOC tried to calm the global financial markets by saying the yuan has no basis to depreciate as the China economy remained sound, some currency traders have even speculated that the PBOC could allow the yuan to fall another 5 percent. The devaluation was China’s recognition that its exports were losing competitiveness in the world market and the overall economy was not growing as fast as it should.

“This move may also trigger a new currency war” if central banks respond by trying to depress their country’s own exchange rates, said Nicholas Teo of CMC Markets in a report.

China keeps a tight grip on the yuan, allowing it to fluctuate up or down just two percent on either side of the reference rate, which it sets daily.

The bank of China’s move is probably not significant enough to make much difference to either exporters or buyers of Chinese exports.

Emerging market currencies including the Indonesian rupiah, Philippine peso and South Korean won rose slightly against the dollar after China yesterday trimmed its yuan reference rate 1.1 percent.

But he added that the PBoC would implement “effective management” of the exchange rate in case of external shocks or extreme currency volatility.

The Chinese central bank’s “opaque communications policy may well have led to panic over-selling earlier in the week”, market analyst Angus Nicholson of IG said in a commentary.

“Our modelling work suggests Fed tightening would be delayed and slower, with US 10-year yields dropping back below 2 per cent in 2016-17″, said Marcos Casarin from the forecasting firm Oxford Economics.

The won has also been among the most badly hurt of currencies in the region, on track to lose 1% this week.

The US dollar bought 124.45 Japanese yen, higher than 124.22 yen of the previous session.

While a limited yuan devaluation shouldn’t greatly change the eurozone’s inflation outlook, S&P said, the reaction in emerging markets is critical.

The PBOC says that it is still on track to grow its economy by 7% this year despite the beatdown in the Chinese stock market and real estate markets.

Over on US shores, July Retail Sales came in this morning as expected with a rebound to 0.6% after another soft number in June. It could dampen the confidence of investors in holding yuan, which could be a setback in China’s goal of the internationalization of the currency.