What Yuan’s devaluation means global FX - why Yen is spread from this?

A weaker CNY against the dollar pooled with the perils of slower Chinese growth would entail a number of relevant consequences for global currency baskets, as reflected by our new forecasts.

In a nutshell, we see the greatest impact on emerging Asian and commodity currencies, with a small adjustment lower to our forecasts for European currencies and the yen relative to the USD. Under our forecasts, other Asian currencies face the greatest downward pressure from the CNY depreciation due to their large economic interdependency with China.

Both the currencies of countries with a high degree of third-country export competition (Thailand and Korea) and those with a relatively high export share to China (Taiwan, Korea again and Malaysia) will face pressure to weaken. Commodity exporters such as Indonesia and Malaysia will be particularly hard hit as scope for margin compression is lower. Only India, with the lowest exposure to China in the region, escapes relatively unchanged.

Japan's large trade weight with China and East Asia more broadly, implies a significant direct effect from changes in China's exchange rate, growth and inflation profiles. Yet, the yen is extremely undervalued already. With the Bank of Japan near the end of its policy rope - we project only limited further easing in April - and wage dynamics rather than the yen likely to play a larger role raising inflation, we could foresee limited room for yen depreciation. Consequently we have raised our six-month USDJPY forecasts to 127 from 123, yet in combination with other forecast changes this implies a yen REER appreciation of 3% relative to spot.