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China devaluation stirs emotions

Published Wednesday, August 12th, 2015

The US has for long been asking China to loosen its controls on the valuation of the yuan assuming that the impact would raise its value. The US was given what it wanted yesterday, but it was a case of beware what you wish for because the yuan fell. It was a clever move by the Bank of China to allow market forces to operate when the timing would stimulate badly needed exports. The surprise is that it has taken this long given the depreciation of the yen on the back of Japan’s enormous QE stimulus.

We now have to wait and see if this is a “one-off” 2% deprecation as claimed by the BoC or the beginning of the long awaited currency war. Markets were not happy with red arrows everywhere on equity and commodity indices. Currency manipulation is at its core an attempt to steal growth from others by increasing exports and decreasing imports. It would be hypocritical of the Fed or ECB to complain as they have been trying to do the same via QE.

Everyone’s growth plan it seems is based to some extent on increasing exports. China, rather like OPEC, is not going to stand by and see its market share decline. The question on everybody’s mind is whether the Chinese move, leading to the biggest fall in the yuan since 1994, is a big enough curveball to delay a US interest rate increase. The yuan has fallen further overnight amounting to a 4% devaluation over the last two days.

to read the rest of the report, please click here

Posted by David Hufton