Ultra-bearish Société Générale analyst Albert Edwards, who forecast China’s currency devaluation years in advance, says the currency is now heading only one way – down.

Edwards’ call is based on pressure being piled on China’s export competitiveness as other Asian countries – notably Japan – aggressively devalue.

Japan, a key competitor in the export market, has seen the yen lose almost 40% of its value against the US dollar in the last three years. Others, including Indonesia have devalued significantly.

As export-based economies devalue their currencies and cheaper goods gain share in Europe and the US, deflationary forces (falling prices) in those western economies are expected to increase, Edwards says.

‘We have long believed that we are only one misstep from outright deflation in the west with core inflation in both the US and Eurozone at just 1%,’ writes Edwards in a research note published on 12 August.

‘We expect the acceleration of emerging market (EM) devaluations to send waves of deflation to the west to overwhelm already struggling corporate profitability and take us back into outright recession.

'As investors realise another recession beckons, without any normalisation of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008.’

Falling prices by themselves are good for western countries. But when corporate profitability comes under pressure because of cheaper goods from abroad, it is hard for them to adjust wage bills lower without cutting jobs.

This would be the framework for Edwards’ recession thesis, though the economist’s timing has been notoriously bad having forecast recession almost continuously for the past two decades.

JAPANESE YEN TO US $ (WMR) - Comparison Line Chart (Rebased)

Issue Date: 14 Aug 2015