As fears of a global currency war grow, all eyes in Asia are on whether China will devalue its currency to avert a sharper economic slowdown.
The urgency with which Asian central banks are cutting interest rates is an indication of not just the deflationary forces they are seeing but also recognition that if China weakens the yuan, their policy options will be severely limited.
Indonesia was the latest to surprise investors on Tuesday with a rate cut, joining Singapore, India and China, all of whom have unexpectedly eased policy this year to spur growth.
Bank Indonesia’s rate cut was in some ways a reminder of how critical China’s yuan is to the region’s policy making.
Indonesia has a weakening currency and inflation that is falling but still elevated. Yet Tuesday’s move hinted at an urgency to act before two major risks play out: a spike in U.S. bond yields or a sharp weakening of the yuan.
Both scenarios could cause steep falls in the Asian currencies and a flight of foreign capital.
While the jury is out on when and how fast the U.S. Federal Reserve will raise rates, the odds of China weakening the yuan are growing, albeit from very low levels.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.