Scoring the Pacific Rim: Asia Barely Hawkish After Yuan Devaluation

  • Thursday, August 13, 2015

1ORM9KMFEW

The dominating story in Asia this week is the People’s Bank of China (PBOC) deliberately moving to devalue their currency, the Yuan. The PBOC regularly posts explanatory releases after policies have been implemented. Due to Prattle’s dedication to providing the best and most current data; we are left to examine the PBOC’s decision via reliable proxy data from economies tightly linked to China: Australia and Taiwan.

Several of China’s proxy banks, mainly Australia and Taiwan, showed very moderate policy scores ahead of this devaluation, which may have been an indication of trepidation since those markets are so tightly linked to China. That said, the region as a whole (GDP weighted) has been showing moderate scores of just barely hawkish at roughly 0.238 on our -2 to +2 scale; indicating Taiwan and Australia may simply be representative of the economic region in which they reside.

Japan and South Korea were the two Asian countries displaying non-moderate policy in recent weeks. Japan has been increasingly dovish, indicating continued struggles to bolster inflation in their domestic economy. South Korea, on the other hand, has been increasingly hawkish, indicating that they may be benefiting from the strong dollar and new Pacific trade agreement boosting consumer sales.

Overall, the big question, whether the Chinese unilateral devaluation of the Yuan is a net positive or negative for regional growth, appears to be a story of timing. In the immediate term, markets will continue to be roiled by a move that will curb Chinese import demand; however, in the long term, markets are likely to be bolstered by continued demand for Chinese exports due to their suddenly weaker currency. In the medium term, the safest investment bets lie within economies tied to China, for example Taiwan and Australia, that will benefit from upside but are less likely to be adversely affected from Chinese government policies.

Prattle will continue to watch the Chinese currency situation unfold, as it will undoubtedly have an impact on the Fed’s decision to raise rates.

The Prattle Team,
click here to subscribe to the signal blog
Every week the Prattle team will be publishing its take on a global central bank region. There are 4 regions–European, North American, South American, and Asian–and the regions will be scored based on our analysis of all the central bank communications in that region over the past week. Indicating the “hawkishness” or “dovishness” of the region, the scores will be given in integers ranging from -2 to +2 where -2 is extremely dovish and +2 is extremely hawkish.

For more precise scoring on individual banks, speakers, and communications, you can reach out to Prattle on our contact page or through this link.