The latest sharp risk selloff in global market took many market analyst by a surprise. Part of the problem seems to be that unlike recent bouts of risk aversion the latest was not triggered by the 'usual suspects' - the Fed, the debt crisis in Europe or the fear of further selloff in commodity prices - but by China.
There is therefore little that the FOMC or the ECB (or, for that matter, the BoJ or the BoE) could do to lift the market risk sentiment. Indeed, the fear is that the Chinese economy is slowing at an alarming pace and that the domestic policy makers have fallen well behind the curve.
To make matters worse, weaker Chinese exports (because of sharp CNY REER appreciation in recent years and still feeble global trade) are among the culprits for the economic malice. This forced the PBOC to join the global currency wars with a bang couple of weeks ago. Weaker CNY should continue to propagate and prolong the negative impact from the Chinese demand shock on commodity and manufacturing exporters around the world, says CAB Bank in a research note on Tuesday.
