Global deflation trends to intensify?

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“Our EM strategists have expected for some time that the Chinese RMB would depreciate around 7-8% this year, while our China-focused strategists have argued that any depreciation would be more benign, because Chinese policymakers have a strong interest in maintaining a stable exchange rate and to avoid being labelled a “currency manipulator”. Investors should not ignore the irony that today, the PBoC intervened to stabilize the currency after only one day of allowing the market “to play a greater role in determining the currency”. This suggests that it is unlikely that the PBoC will completely give up control and allow the official rate to drift along with spot market rates. The balance of forces were already tipped toward more global deflation. Weaker RMB would only serve to further undermine Emerging Asian currencies, which means that China along with the whole of manufacturing Asia, will potentially further cut export prices in U.S.D terms. That would continue to suppress inflation in the rest of the world in general and the U.S. in particular. U.S. import prices from Asia are already deflating.” (VIEW LINK)

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