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Will China Be the Next Forex Peg to Break?

January 19, 2015

By Craig Stephen

HONG KONG (MarketWatch) — The surprise move by Switzerland to scrap its currency ceiling against the euro last week is a reminder there can be unexpected collateral damage from central banks waging currency wars. As markets digest last week’s turmoil, expect focus to turn to other fault lines on the global currency map.

Here China stands out, as like the Swiss, it runs an implicit currency peg that is becoming increasingly painful to maintain.

Due to its longstanding crawling peg to the U.S. dollar, the yuan has increasingly found itself pulled higher against just about every major currency. The world’s largest exporter has already had to endure two years of aggressive yen devaluation since the introduction of Abenomics and its accompanying quantitative easing.

Now comes a new front, as the European Central Bank (ECB) looks ready to green-light its own QE next week. The move by Switzerland also means the Swiss National Bank (SNB) ceases its purchases of euros needed to maintain its peg, again meaning the euro will all but certainly head lower.

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