Global market sell-off intensifies as China currency drops

It is also fanning political tensions with the United States and Europe, whose exports could become comparatively costlier.

In 2011, the Nigerian Central Bank pledged to store between 5%-10% of its foreign reserves in yuan, alongside dollars and euros. A cheaper yuan will benefit China’s exports by making them less expensive overseas.

China’s yuan was valued at 6.32 per dollar on Tuesday, compared with 6.21 per dollar a day earlier.

“Commodity prices are likely to remain volatile with a downward bias until events in China stabilize”.

“This move won’t solve some of the pressing problems China faces”, Sung Won Sohn, an economist at California State University Channel Islands, cautioned in a research note.

“For years, China has rigged the rules and played games with its currency”, said Sen. And that easing has had the effect of weakening their currencies by a large multiple of China’s 2 percent devaluation. But the decision accentuated worries over the health of the world’s second-largest economy, pulling shares and prices of oil and other commodities sharply lower.

The Chinese yuan’s market rate fell 1.8 percent after Tuesday’s almost 2 percent decline, which was the biggest drop in a decade. France’s CAC-40 fell 1.5 percent, and Germany’s DAX lost 2.4 percent. The yuan USDCNY, +0.9944% was down nearly 2% at one point on Wednesday, but trimmed its losses after Beijing intervened to stop the tumble, according to The Wall Street Journal.

CHINA’S DEVALUATION: The worldwide Monetary Fund welcomed Beijing’s move toward more flexible exchange rates, but many investors saw it as an attempt to stimulate a slowing economy.

The devaluation process has already triggered a series of currency depreciations elsewhere, he noted, which could quickly offset some of China’s gains in competitiveness.

With markets again reacting today to the Chinese currency news, it is important not to lose sight of the economic bottom line: This week’s currency policy decision is the right structural step for the country over the medium-term (and eventually for the global economy); but, also important and more immediate for financial markets, it is occurring at the wrong cyclical time for a world that is struggling mightily to generate sufficient high-quality growth. But analysts said the move was unlikely to spur competitive devaluations and would have only a modest impact. Japan’s Nikkei 225 fell 1.2 percent to 20,476.65 and Hong Kong’s Hang Seng dropped 1.3 percent to 24,186.92. The Nasdaq composite index fell 29 points, or 0.6 percent, to 5,072.

Energy: U.S. crude fell 3 cents to $43.05 a barrel in electronic trading on the New York Mercantile Exchange.

The yuan hit a four-year low yesterday, falling for a second day after the central bank devaluated the currency by 1.9 per cent on Tuesday. Brent crude, a benchmark for global oils used by many U.S. refineries, rose 12 cents to $49.30.

BONDS AND CURRENCIES: The dollar gained to 124.85 yen from 124.82 yen Monday. The euro rose to $1.1118 from $1.1047.

The Fed wants to be “reasonably confident” that inflation is returning to its 2 per cent target before raising rates.

Still, Feroli said, “we think this a minor stumbling block for a September” rate increase.

Business Insider reached out to Mohamed El-Erian for his take on the surprise Chinese currency move.

Early on Wednesday, the bank sought to reassure investors its move to devalue the currency wouldn’t lead to a free fall in the yuan.

China is battling slowing growth.