As the falling Chinese yuan shakes up global markets, it is worth considering some of the slower burn implications for asset markets. It appears the yuan has much further to fall and the process could well run for years ahead. Deutsche gives you idea of just how far it may have to devalue to offer any real economic assistance:
Put simply, the more global currencies weaken against the USD, so will the yuan. The easiest point of reference is the new CNY trade- weighted index published by the authorities last year. Taking the hypothetical case of a uniform drop of 5% in all world currencies against the dollar, this implies USD/CNY has to rise by around 15% to keep the yuan stable at current levels (chart 1). This of course implies that the currency is indeed kept stable rather than actively weakened, with the markets likely to closely watch whether we breach the key 100 level in coming weeks (chart 2).
Put simply, if China allows USD/CNY to appreciate in line with dollar strength against other currencies, the broad trade-weighted dollar will appreciate by even more. Taking the September 2014 – April 2015 euro weakening period as a template, the broad dollar would have appreciated by 3% more had the Chinese authorities moved USD/CNY higher to offset weakness in EUR/CNY.