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Will the RMB Devaluation be the First Shot in a Currency War?

The biggest news in the currency market this week is the People's Bank of China (PBOC) devaluing its currency, the Renminbi (RMB), or Chinese Yuan (CNY). This intervention is most likely a reaction to soft economic outlook, as an attempt to boost exports.

This move might have ripple effects on other central banks. The FOMC for example might not be as eager as it has been to raise rates. The timeline might move back a few quarters. The RBA for example might become dovish again since it is a major exporter to China, and if the Yuan devalues, it might hurt Australia exports. So yes, I think this will cause somewhat of a "currency war". Remember, even though it is not an international reserve like the USD, the Chinese Yuan has become a major intermediary in many international trades especially in Asia. 

Will the PBOC continue to devalue its currency? From a domestic economic policy standpoint, it appears to have the inclination to do more. However, if the PBOC wants the RMB to become more of a global reserve, it might want to curtail its intervention. 

Let's take a look at the Chinese Yuan vs. The US Dollar:

CNY/USD Daily Chart 8/12
(click to enlarge)

The daily chart shows the dramatic drop after several months of tightness around 0.1610. When we look at the weekly chart, we can see that CNY/USD peaked around 0.1661 early 2014, but has been moving sideways for a little over a year before this week's intervention. 

CNY/USD Weekly Chart 8/12/2015
(click to enlarge)

Price is now at levels not seen since 2011 and threatens to continue. Along with this volatility in the CNY, expect some volatility in the rest of the currency markets as well.

Trading Strategy Adjustment:
I believe it is a time to tread lightly or pound it hard, depending on the type of strategy. Your conventional strategies and tactics might not work so well, but if you see some "displacement" in the next week or so that needs to be corrected, you might want to take the risk, even if it means going against your usual strategy. At the end of the day though, don't let this seemingly significant event get you carried away. Staying in the game should be one of the main goals of any trading philosophy..