This week has seen attention in FX markets largely reside with events in China, after the PBoC lowered the CNY reference rate against the USD three times this week. The inevitable uncertainty over the future direction for the currency prompted speculation of a potential 10% devaluation target, which the PBoC called groundless, while also signaling that the bout of volatility not be seen as a trend, but as a short-period of adaptation to its new price mechanism.
Nevertheless, the uproar across financial markets saw an aggressive bid tone in USTs, resulting in flattening of the euro/dollar curve as market participants speculated whether the actions by the Chinese central bank would prevent the Fed from raising rates in September. Of note, analysts at Barclays (LONDON:BARC) stated that although they still favour the Fed to lift rates in September, the probability has fallen somewhat. At the same time, NYSE:HSBC strategists noted that the probability has fallen from better than even to around one in three. As a result, despite the risk averse sentiment, USD index finished the week lower and in turn supported EUR/USD, which also benefited from FX recycling related flows.