Emerging Assets Weaken after Yuan Devaluation

Emerging market currencies tumbled on Tuesday in the wake of China's record 1.9 percent currency devaluation, which took offshore-traded yuan 2.5 percent lower and rekindled fears for growth in the world's No. 2 economy.
  China's central bank cut the yuan's daily fix, effectively devaluating it against the dollar after data released on the weekend showed an 8.3 percent slump in Chinese exports. Bigger moves down in the more freely traded offshore yuan pushed the spread between it and its onshore counterpart to its widest in more than 10 months.
"Views are really diverging, from people believing this is entirely due to the softening of the economy, to help exporters..and people thinking that the fact that the market will play a big role in the daily fixing is a positive thing," said Karine Hirn, co-founder of asset manager East Capital.
Views on implications seemed unanimous however, she said.

"Capital outflows will likely intensify. Companies with dollar debt will suffer. (But) this could lead to more reserve ratio cuts, which is why A-shares markets may get support."
Oil prices fell, while the Asian ex-Japan equity index hit 1-1/2 year lows and most regional currencies slumped.

The Singapore and Taiwan dollars and the Philippine peso touched five-year lows against the greenback, while the rupiah and ringgit traded at new 17-year lows and the won slid to a new three-year lows as traders reckoned more central banks would allow currencies to weaken amid slowing growth.

Singapore's data showed gross domestic product fell 4 percent in the second quarter from the previous quarter, adding to the picture of sluggish emerging market growth.


Those fears for world growth and the implications of the Chinese devaluation hit oil prices and stock markets. Chinese mainland shares closed flat to lower while MSCI's emerging equity index retreated 0.3 percent.
Rabobank analysts saw the dollar/yuan spike as the beginning of further gains.

"It is worth pointing out that on previous occasions after dollar/yuan broke from a multi-week sideways trend it extended the initial move in the following weeks," they said, predicting the yuan would test 6.35 per dollar.
Currency weakening was less pronounced outside Asia, with the Russian rouble and South African rand down 0.3 percent , while the currency of oil importer Turkey strengthened 0.4 percent
The benefits of weaker oil were evident in data showing Turkey's current account gap narrowing in June to $3.36 billion - an above-forecast figure but well below May's $4.4 billion.

Turkey has been buffeted by increased fighting between its military and the outlawed Kurdish PKK movement but hopes grew that the ruling AKP would cobble together a coalition with the opposition CHP, with party leaders due to meet this week.

Turkish shares rose more than 2 percent.
Central European markets too will benefit from weaker commodity prices, and also gained ground after Greece and its creditors reached a bailout deal, shrugging off weakness in Western European bourses.

The Athens index rose 1.5 percent while Polish and Czech shares firmed half a percent . The region's currencies were weaker, with Hungary's forint down the most after data showed below-forecast July inflation