Yuan weakness inevitable after BoJ´s decision to cut rates

The Bank of Japan´s decision on Friday to cut interest rates made further weakness in the Chinese currency "inevitable" - especially versus the Japanese yen - and smacked of "total desperation", a well-regarded strategist said.

China would "have no choice" but to devalue after the BoJ took its interest rate on deposits held at the central bank to -0.10%, Ashraf Laidi said in a research note sent to clients.

Asia´s largest economy had seen its currency, the yuan (CNY), stregthen 75% versus the Japanese yen since 2011 to June 2015 and afterwards depreciate by just 12%.

Japan´s yen accounted for 15% of the yuan´s trade-weighted basket of currencies which Beijing had repeatedly said in the past it wanted to keep 'stable'.

"Further devaluation is inevitable and its impact on global markets will be negative, including the rising yen," Laidi said.

BoJ governor Haruhiko Kuroda´s decision to lower rates also spelled the end for the central bank´s programme of quantitative easing, because the country´s policy-makers were running out of sovereign bonds to purchase, given that pension funds were loathe to sell theirs.

"But where will it find the extra bonds when current holders of JGBs (insurance companies and pensions funds) will simply not sell?"

"The fact that the BoJ voted 5-4 in favour of negative rates and 8-1 to keep monthly assets purchases unchanged exposes the controversial nature of the decision to re-enter negative rates and the unfeasibility of adding fresh QE," Laidi said.

A violent appreciation in the yen in the five weeks leading up to the 29 January rate cut had been instrumental in the BoJ´s thinking also reduced the probability of further structural reforms and might even mean that the next tax hike might be postponed, the strategist concluded.