A battered start to the New Year

THE start of a new year often brings hope that things will be better. Unfortunately, the first five trading days of 2016 have seen a continuation of where we ended last year: a weaker SGD, lower FTSE STI, and higher domestic interest rates. The continued depreciation of the CNY and sharply lower oil prices continue to haunt us. It's a new year - but with the same old problems.

The depreciation of the Chinese yuan (-1.5 per cent) against the US dollar has led to questions over the government's intentions for the currency, and is raising concerns of greater regional currency volatility and global deflationary pressure. The USD/CNY and USD/CNH rose to five-year highs this week and comes on the back of a disappointing Caixin manufacturing PMI reading on Monday, coupled with the People's Bank of China (PBOC) guiding the CNY weaker versus the USD in recent days. The higher USD/CNY fixings signal to us that the PBOC is more actively managing the CNY on a trade-weighted basis, considering that the USD has strengthened broadly in recent days versus major currencies.

Although the trade-weighted moves in the currency so far have been relatively small, uncertainty over the government's policy means the tail risk of a larger move has risen, and with China already experiencing relatively weak nominal growth, a risk scenario of sustained depreciation in the yuan could push sales growth for global companies in China into low single digits - a major change from the double- digit growth of recent years.