Investors fear currency war after China’s third yuan devaluation

<p>Markets worry that other countries may feel pressure to devalue.</p>

China has set the guiding rate for its currency lower for a third consecutive day, fuelling fears of a currency war.

The central bank put the yuan’s central parity rate at 6.4010 yuan for $1 today (August 13th), a 1.11 per cent drop from the previous day’s 6.3306.

The People's Bank of China (PBOC) said that the way it sets exchange rates would now become more market-oriented. It will now take into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies.

The move sparked concerns over a currency war, with other countries feeling pressure to devalue.

The devaluation is the latest effort from the Chinese government to revive the country's economy and support trade after fresh data revealed exports fell by 8.3 per cent in July. A weaker yuan will make products cheaper abroad.

In a press conference in Beijing, the central bank tried to reassure markets, saying the country's strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves remain "strong support" for the exchange rate.

Analysts believe a further devaluation is possible

But analysts believe market forces could pull the currency even lower in the next days. China only allows the yuan to fluctuate up or down two per cent on either side of the reference rate.

Should the yuan trade in the lower end of this two per cent margin, the central bank is likely to lower its reference rate once again on Friday, according to the BBC.

However, PBOC economist Ma Jun told the Xinhua news agency that China could intervene to stabilise the yuan if needed. "The central bank, if necessary, is fully capable of stabilising the exchange rate through direct intervention in the foreign exchange market to avoid the herd mentality resulting in irrational movements of the rate," he said.

He also denied that China was seeking to wage a currency war, arguing it is not needed as exports are expected to pick up in the second half of the year.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.