US financial instability still in risk

The move by the PBoC could trigger an episode of capital flight out of China and other emerging market economies. 

Barclays suspects, "If so, the episode could lead to a worsening of financial market conditions inside the US, which would be of material concern to US policymakers. Initial moves in global capital markets are consistent with a risk-off sentiment and we will be watching the response of markets in the coming days and weeks."

Financial conditions in the US, to date, have worsened somewhat, yet still remain highly accommodative. Financial conditions worsened early in the year, but this was primarily in response to the back-up in longer-dated government bond yields. Since mid-year, when risks of a Greek exit intensified, financial conditions have been fairly stable, though financial stress has picked up.

"Our base case remains a September hike. Altogether, while the move by the PBoC highlights the risks to the US outlook, they do not, at present, alter our view. We retain our call for a September hike, but believe the probability has fallen somewhat as the move may raise concerns in the mind of the FOMC about global growth and inflation pressures. If so, the committee could choose to defer rate hikes past September", says Barclays.