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Why CNY Depreciation Matters For EM Currencies

CHINA
  • The last few days have seen significant moves in the CNY, with USDCNY breaking some key technical resistance lines (200DMA, LT downward trending line) and currently approaching its ST key resistance at 6.5120 (July 2021 highs).
  • Looking at the WoW change (>2%), it was the biggest move since the August 2015 ‘devaluation’, which generated a market shock with the SP500 falling by over 10%.
  • Interestingly, the CNY depreciation has also coincided with some sharp moves in EM FX.
  • For instance, it was surprising to see that ‘risk on’ ZAR experienced strong selling pressure this week despite an ease in price volatility (in the first half of the week); the rand is the worst performing currency this week, down over 6% against the USD.
  • The bottom chart shows that CNY has shown strong correlation with ZAR over time (daily returns), particularly when the implied vol on CNY is surging.
  • The rand may have been impacted by the recent flooding in and around Durban, but the CNY weakness may have been a stronger driver of the USDZAR this week, triggering some key stop losses and therefore exacerbating the move.
  • Therefore, further CNY weakness may matters for some EM currencies in the short term despite EM policymakers maintaining a hawkish to tame inflation (CEEEMA ex- Turkey and Latam)..

Source: Bloomberg/MNI

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