Brief comments from Goldman Sachs likening the People’s Bank of China's changes to the yuan exchange rate regime to the SNB's removal of the 'peg' in the EUR/CHF in January
"Both episodes show how challenging it is to maintain a currency peg in periods of large exchange rate moves, particularly when weak domestic fundamentals in China contrast with the ongoing recovery in the US," GS clarifies.
"As such, we see the move as an endorsement of broad Dollar strength - something we expect more of.And even if the market begins to doubt a Fed 'lift-off' in the near term, the relative impact of CNY weakness on growth and inflation should be smaller for the US than for other economies," GS argues.
"Our view remains that recent outflows should moderate; however, should outflows persist in response to sustained weakening in the CNY, they may lead to further intervention by the PBoC to slow the depreciation of the currency by selling reserves.If reserves continue to fall, there may be a reverse of the reserve recycling that supported demand for currencies such as the EUR, AUD and CAD," GS adds.