Global markets are still reeling from China’s devaluation of the yuan last month. Investors might want to prepare for more of that volatility and more yuan downside because some analysts expect the worst has yet to come for the Chinese currency.
The WisdomTree Dreyfus Chinese Yuan Fund (NYSEArca: CYB), Market Vectors Chinese Renminbi ETN (NYSEArca: CNY) and the CurrencyShares Chinese Renminbi Trust (NYSEArca: FXCH) are sporting an average one-month loss of 3.4%.
Beijing revealed that exports declined 8.3% in July, the largest drop in four months and worse than the expected 1% dip. Exports to the Eurozone plunged 12.3% in July and shipments to the U.S. fell 1.3%.
The sudden shift in its currency policy suggests that Chinese officials are seeking a way to stimulate growth after a series of monetary and fiscal policies failed to significantly bolster the economy.
“Some Chinese government agencies are planning on the assumption of the U.S. dollar/Chinese yuan exchange relationship at 8.0 for the end of 2016, implying devaluation of another 20%,” reports Dimitra DeFotis for Barron’s, citing Bank of America Merrill Lynch Research.
The PBoC’s move may also signal a start to the country’s move toward reforms – many have criticized China’s currency policy, arguing that the central bank has artificially strengthened the yuan. Consequently, with the devaluation, the yuan may be more closely aligned with market actions.