Emerging markets hit by China currency moves

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Emerging market stocks and currencies dropped yesterday after the news of a second currency devaluation in China.

The People’s Bank of China devalued the yuan for the second day running, causing a knock-on effect in emerging markets, reports the Financial Times.

The MSCI Emerging Markets index fell to its lowest level since October 2011, plummeting 1.6 per cent on the day to 863.82. Meanwhile, both the Hong Kong’s Hang Seng index and the Shanghai Composite fell, dropping 2.4 per cent and 1 per cent respectively.

Currencies were hit too, with those in Asia and Latin America seeing a drop on the day.

Among the largest fallers were the Malaysia ringgit, which dropped to its lowest level in more than 15 years, and the Indonesia rupiah, which was down 1.4 per cent to a 17-year low.

However, the PBoC tried to reassure markets that it was not pursuing a continued devaluation of its currency.

More weakening of both the yuan and other Asian currencies are expected, says Jason Daw, analyst at Societe Generale.

He says: “With the [renimbi] no longer an anchor for regional [foreign exchange], there is more scope for Asian currencies to weaken. China’s new [foreign exchange] regime also means that implied volatility and risk-reversals will be structurally higher.”