Most shares in the region climbed as China kept its currency steady for a second day.
The currencies are a mixed-bag-o-nuts this morning, with the euro rallying again, and in the face of some not-so-great data prints, which only points out what I’ve been saying all week, and that is that the euro has benefitted from the Chinese devaluations, as money continues to leave China, and go home, wherever that is.
The Philippine economy is least affected by the devaluation in China.
“You had solid numbers out of the U.S.” last week, including U.S. retail sales, making a rate increase nearly certain for mid-September, said Tim Condon, a strategist at ING.
Strictly speaking, this was not a “devaluation”. After all, it is the largest trading partner to more than 140 countries in the world.
Foreign exchange traders will digest the RBA’s board meeting minutes on Tuesday for clues as to its interest rate strategy. If it is increased, the term is “revaluation”. The government, including the central bank, does not take any action to influence the exchange value of the currency. The lack of RMB volatility, and the perceived one-way appreciation of the RMB created moral hazard where corporate chief financial officers were incentivized to profit from having assets in RMB and liabilities in U.S. dollars. As a result the commodities prices have seen a fall post yuan depreciation.
Strategists at Bank of America/Merrill Lynch said in client notes that China’s move may be the early stages of a near 10 percent devaluation of the yuan against the U.S. dollar over the next year. But this target rate is not rigid. Not just China but many developing countries that have borrowed heavily on the external finance markets have been fearing the impending rise in the Federal Reserve prime rate and the accompanying rise in the US dollar that will, it is widely expected, accompany the Fed’s move. It traded within a tight range between 6.3915 and 6.3967.
“Also many central banks hold quite low levels of gold reserves in relation to their forex holdings, leaving room for further accumulation”.
That’s because China last week also changed the way it sets the daily reference rate to a more market-oriented calculation method. This is because weakening the Yuan will hit exporters to China hard by crimping the dollar-buying power of Chinese importers. The changes will link the opening rates more explicitly to the closing level of the day before. Specifically, does lack of intent matter?
However, cheaper Chinese products will exert pressure on developed economies, which are already facing deflationary risks. That certainly was not the primary objective of Fed policy, but it was an important and inevitable effect that every decision maker involved was fully aware of.
“Imported coal must be priced competitively against domestic coal, turning China into the global price setter”. Market forces are driving the value of the renminbi down. Xi wants the discipline the market provides for a corrupt China that has too many bad debts, but he also wants stability and central control that, in the end, are antithetical to topsy-turvy market capitalism. Then what would critics like Donald Trump and Democratic Sen. Currency wars might ensue if they retaliated with their own competitive devaluations. The Singapore Strait Times Index (STI) dropped as much as 4.2 percent last week before recovering to close the week down 2.6 percent. September Comex Silver rose 2.46% and October NYMEX Platinum posted a 3.16% gain. Moreover, as in 1997 in Korea and Hong Kong, the positions of sundry Chinese financial companies are highly opaque.
This is yet another example of tinkering exercised by the Chinese government in an effort to test the resolve of the operation of a market economy, and the marketisation of its currency.