A fresh devaluation of the Chinese yuan by 0.5% and an early closure of the country’s stock markets as indices fell by their daily maximum of 7%, led to further risk aversion in global financial markets. Specifically, as the People’s Bank of China fixed the yuan at 6.5646 versus the dollar, down 0.5% on the day (a relatively big adjustment), it marked the lowest for the currency since 2011. This created some uncertainty about where the Chinese authorities would eventually want to guide the yuan as well as worries about the health of the Chinese economy.
Stock market indices and index futures around the world fell afresh, after an already challenging beginning of the trading year this week. In foreign exchange markets the safe haven yen gained, as it pushed the dollar significantly below 118 at some level (the dollar reclaimed the 118 mark later) and euro/yen towards 127 (127.19 session low).
The Australian dollar was also severely hit as it dropped to as low as 0.7024 against the US dollar, rebounding to 0.7055. The aussie has taken a severe hit as a result of developments in China.
Commodities – with the exception of gold – were also lower as oil dropped to a fresh low of $32 a barrel. This of course hurt oil exporter currencies such as the loonie and the ruble. Gold unsuccessfully challenged the $1100 an ounce mark.
Looking ahead to the remainder of the day, the main news will come out of the Eurozone in terms of unemployment and retail sales for November. Given the delay that the data is released with, it might not have as much impact. More important perhaps will be the release of the region’s business and consumer confidence for December. Later during the US session, weekly jobless claims should attract some attention, as should speeches from Fed regional presidents Lacker and Evans. Tomorrow monthly data on Chinese forex reserves and Australian retail sales will be the main items to watch.