China Stimulus Pressures Asian Central Banks

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.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza