Tags: Currency War | United States | China | Economy

Currency War Will Be Damaging, but Not Fatal, to US

Currency War Will Be Damaging, but Not Fatal, to US

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Wednesday, 12 August 2015 09:55 AM Current | Bio | Archive

No doubt, these days will become of historical significance for global markets as China has now devalued its currency the renminbi/yuan (CNY) for a second day in a row — by 1.6 percent today (midpoint set at 6.33 per dollar) — after a 1.9 percent unexpected weakening move yesterday (midpoint set at 6.22 per dollar).

The moves bring the CNY to its weakest level since 2012, but still better than the low point set in January 2010 at 6.81 per dollar. Overall all this represents the biggest 2-day drop of the CNY since 1994.

The Peoples’ Bank of China stated today: “…under the managed floating exchange rate regime, the fluctuation of RMB (renminbi/yuan) central parity is normal … central parity quotation helps reduce distortion and push central parity of RMB against US dollar towards the equilibrium market rate … Since the third quarter of 2014, China’s significant trade surplus and the appreciation of USD against other major currencies have affected the RMB exchange rate in different directions … currently there is no basis for persistently depreciation of RMB.”

We also got another dose of negative Chinese economic data, which shouldn't be overlooked, as China’s National Bureau of Statistics informed electricity output fell by two percent year-on-year.

All this means we probably could see the Chinese currency moving substantially lower over the short- to median-term. I wouldn’t be surprised seeing the seven (7) CNY handle per USD before the end of the year.

I also think that won’t probably be the end of the story as China’s economy will still have continuously to face serious headwinds as growth probably will slow further to well below (a couple of percentage points) the actual “official” 7 percent growth rate.

In the meantime, overall markets clearly don’t seem to like the "unexpected" Chinese devaluation.

Most of the important equity markets, from Germany, to London, to Australia, to Hong Kong, to Singapore, to the U.S., to Brazil, and so on, are all down significantly.

Yes, it’s global risk-off once again.

The emerging-markets currencies also are significantly lower as shown by the Bloomberg JPMorgan Asia Dollar Index ADXY which is today down another negative -1 percent to a fresh 6-year low.

Interestingly, we see the euro moving up against the dollar as:
  • There is some short-covering going on;
  • U.S. Treasury yields moving down as a consequence of the flight into “safety”;
  • And rising perception in the markets the Fed could delay its first rate hike until December.
Commodities also remain very weak as very well demonstrated in the Thomson Reuters/Core Commodity CRB Commodity Index, which is down by more than 31 percent year-over-year.

Long-term investors could do well keeping in mind a weakening Chinese currency is also an extra global “disinflationary” driver.

Also interesting and really contrary to what markets seem to reflect is a relative positive comment of an IMF spokesperson who states in an email today: “Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets ... we believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years. Regarding the ongoing review of the IMF's SDR basket, the announced change has no direct implications for the criteria used in determining the composition of the basket. Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the renminbi were included in the currency basket going forward.”

No doubt, we'll have bumpy roads ahead that will be littered with potholes of “volatility spikes” caused by a further/deeper weakening of the Chinese renminbi/yuan as it will “un-peg/un-couple” from the dollar and by doing so will try to become more export-competitive with countries like South Korea, Japan, Indonesia, etc.

Chances are rising we are at the dawn of a new edition of a global currency war.

Please keep in mind the U.S. economy is 87% domestic, which makes it less vulnerable to a currency war, which doesn’t mean it won’t cause damage if it were to occur, but certainly substantially less than what would happen to the Far East economies and the big EU exporters like Germany.

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HansParisis
Chances are rising we are at the dawn of a new edition of a global currency war. Please keep in mind the U.S. economy is 87 percent domestic, which makes it less vulnerable to a currency war.
Currency War, United States, China, Economy
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2015-55-12
Wednesday, 12 August 2015 09:55 AM
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