China devalues
We warned yesterday that the Chinese authorities may finally feel the need for further currency-based stimulus of the economy following Sunday night’s atrocious trade numbers. It was nice to be proved right in less than 24 hours.
Overnight, the People’s Bank of China has cut its daily reference rate for the USD/CNY against the US dollar by 1.9 percent. The move has weakened the CNY by 1.9% overnight – the biggest fall since 1994. It is not difficult to see why the Chinese have felt the need to do this. Previously the yuan had been kept strong to keep imports of raw materials cheap, to stymie efforts of capital flight and to push the argument with the International Monetary Fund that the yuan should be an international reserve currency.
This move overnight is about none of those and is about promoting growth as best as it can. The de facto peg of the yuan to a resurgent USD has hurt the Chinese economy whilst economies around it have been able to devalue their currency numerous times.
Global consequences
The ripple effects across other markets are likely to come in two stages. Initially we are seeing a broad sell-off in riskier assets with the high yielders of AUD and NZD hurting alongside regional counterparts such as the Korean won and the Singaporean dollar. In the short term, you would have to expect it to bring about some USD strength although the weakness in the Chinese economy that has brought about this move will also have some people doubting the likelihood of a September rate rise from the Federal Reserve.
China is also painting this move as a ‘one off’ but I think that you would be hard-pressed to find someone outside of Beijing that believes that. The weakness of the global economy – characterised by the weekend’s poor trade numbers – will be helped by the devaluation of the yuan but to suggest it as a panacea is rather frivolous.
Greece agrees deal with creditors
In another surprise bit of news overnight, Greece and its creditors are said to have reached a deal on a rescue package. Talks between Greece and the European Commission, European Central Bank, the IMF and European Stability Mechanism to lend as much as 86bn euros to Greece are said to have ended successfully overnight. Some details remain but it now looks like measures will be in place in time for the ECB bond repayment of EUR3.2bn on August 20th.
It looks like the Greek problem is finally back in the box.
Elsewhere
Markets are obviously still chewing through the news from China as we open up in Europe this morning. Data from the Eurozone comes in the form of the German ZEW economic sentiment release that will likely continue recent positivity.