Mubasher: Asian markets are preparing for a full-blown currency war, after the Chinese yuan (CNY) plunged beyond the CNY 7-per-dollar level, raising the odds that policymakers could allow weakening their exchange rates to maintain a competitive edge, according to Bloomberg.

On Monday, Asian currencies endured a slump, with the South Korean won (KRW) hitting the weakest level in three years after the offshore yuan dropped by roughly 2% to an unprecedented trough of CNY 7.1114.

Bucking the trend, the Japanese yen (JPY) and Treasuries rallied as risk-off sentiment was boosted.

“Without a doubt the global currency war is here, and it’s a natural extension of the trade war that’s just taken a turn for the worse,” Melbourne-based Salter Brothers Asset Management director George Boubouras was quoted by Bloomberg.

US President Donald Trump announced last week that he would impose a 10% tariff on $300 billion worth of Chinese products as from 1 September, technically extending tariffs to all of the imported goods from China.

Moreover, Trump threatened that he could raise tariffs further if his Chinese counterpart Xi Jinping failed to proceed quickly to reach a trade deal.

In response, Beijing pledged to fight back against Trump’s action.

Traders regarded the yuan’s slump as an indication of the Chinese government’s willingness to utilise its currency as a tool amid deteriorating ties with the US.

The People’s Bank of China (PBoC) said that it would keep the Chinese yuan stable after the drop which it attributed to expectations of further levies on Chinese products.

“We’re likely to continue seeing the effects reverberate through markets [and] I expect to see the yen, dollar and Treasuries continue to strengthen as things heat up,” Boubouras said.

The yen advanced against all of its key rivals, hitting JPY 105.80 against the dollar, the strongest since a crash last January.

The 10-year treasury yields shed 8 basis points (bps) to 1.76%, the lowest since around three years.