In an effort to calm volatile markets, the PBOC said late last week it sees no reason for the yuan to fall further. Commonwealth Bank currency strategist Richard Grace said the Australian dollar will come under pressure from the lower yuan, as well as from factors such as lower commodity prices and higher US interest rates.
Bullion premiums above London prices on the Shanghai Gold Exchange – which had spiked to $6.50 per ounce on this week’s Yuan devaluation – today eased back to historical norms at $2.50 on quieter trading volumes. The PBOC has exited regular intervention, and will act when the market’s volatility is excessive, Yi said. Serious consideration should be given to cutting the key interest rate even further and increasing money supply.
As for fears that China’s attempt to help its export sector compete internationally with a cheaper yuan will lead to counter moves by other exporter nations in Asia and globally, the PBOC is not concerned. If Beijing is really determined to trigger a race to the bottom in order to keep its economy on the move, then investors should not underestimate the knock-on impact.
The government’s erratic responses to economic fluctuations also underline the ruling Communist Party’s ambivalence vis-a-vis fee market principles.
On August 11 the Chinese Yuan (Renminbi) dropped in value by about 2%, pushing the Chinese stock market woes and the standoffs at the Trans-Pacific Partnership negotiations out of the headlines.
“But there’s some questions marks now about whether or not they will raise rates after what the Chinese did last week”.
Meanwhile, overall U.S. inflation still hovers just above 0% and while it’s true that this is partly a result of the temporary effects of the surging U.S. dollar, other longer-term trends are also keeping prices down.
Ryan Sweet, director of real-time economics at Moody’s Analytics, agreed: “the minutes are going to be wishy-washy about when to raise rates”.
The dollar was hitting a resistance point at US74¢ but any signal from the Fed of a slowdown in the trajectory of rate hikes could push the dollar towards US75¢, he said.
China’s devaluation means Beijing has taken a step again from its progress technique based mostly on boosted home consumption. I said last week that the final bubble in this bull market would be triggered by a desperate search for growth and income in a stagnant world. Now there is even more uncertainty.
Tom Stevenson is an investment director at Fidelity Worldwide Investment.