PBOC unshackling the Yuan

The yuan depreciated past a significant threshold that China had been defending for several months, signaling to traders that policymakers may be willing to allow currency depreciation amid an economic recovery that is slower than expected.

On Friday, the onshore yuan breached the 7.20 per dollar level that it had largely maintained since November. This depreciation had a cascading effect on Asian markets, leading to declines in some regional currencies and dampening sentiment towards China-linked assets.

The catalyst for this movement was the People's Bank of China's decision to lower its daily reference rate for the yuan by the most since early February.

It's possible that the weaker yen played a significant role in this scenario, especially after the Japanese currency unexpectedly weakened following the Bank of Japan's rate hike. From the perspective of gaining a competitive export advantage and stimulating domestic export activity, it appears that the People's Bank of China is finally responding to what Chinese watchers have been advocating for. This decision could have implications for both domestic and international economic dynamics.

Indeed, the weaker yuan is likely to have a significant impact across G-10 currencies, especially in Asian FX markets where correlations tend to be tighter. The depreciation of the yuan can create a magnetic effect, influencing the direction of other currencies in the region as well. This interconnectedness often amplifies the effects of currency movements within the Asian FX space.