Markets around the world fell for a second day on Wednesday, with stocks, the dollar and emerging market currencies all under pressure after China pushed the yuan lower again overnight, boosting the appeal of top-rated government bonds. But a weaker yuan also benefits China by making exports cheaper to overseas customers.
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If other nations in the region also decide to devalue their currency in response, it could leading to so-called competitive devaluation, also known as a currency war. The dollar’s weakness lifted the price of oil, as U.S. crude rose 1.2 percent to $43.60 a barrel, while copper gained 1.3 percent to $5190 a tonne.
BMO Capital Markets Chief Investment Strategist Brian Belski discusses his investment ideas in the wake of China’s yuan devaluation.
US stocks declined on Tuesday as China’s surprise devaluation of the yuan currency hit companies with a big exposure to the country and added to worries about the global economic outlook.
A devalued yuan makes China’s goods more affordable for foreign buyers and, conversely, foreign goods more expensive for Chinese consumers.
“Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets”, an International Monetary Fund spokesperson said.
However, with July’s U.S. job report being somewhat encouraging and all signs pointing to the U.S. Federal Reserve increasing interest rates in either September or December, China is clearly signaling that it will not move in step with the United States and will allow its currency to trade lower if need be.
China has two reasons to let the yuan depreciate.
The Fed wants to be “reasonably confident” that inflation is returning to its 2 percent target before raising rates.
The benchmark Shanghai composite index closed down 1.06 percent to stand at 3,886.32 points. “They’re just destroying us”, the billionaire businessman said.
Economists pointed out that until Tuesday, China had held the yuan firm while its neighbours had debased their currencies. By mid morning the Dow Jones industrial average was down 240 points.
Analysts cautioned against seeing Beijing’s move as a direct effort to help Chinese exporters.
The yuan hit a four-year low on Wednesday. Industrial output expanded only six percent year on year in July, down from 6.8 percent in June. She said that would represent a “sea change in China’s exchange rate policy” but would help to support flagging economic growth.
The bank said that starting Tuesday, in addition to the previous day’s exchange rate, the daily fixing of the trading band will take into account supply and demand.
Total turnover of the two exchanges shrank to 1.1 trillion yuan ($173.8 billion), down from 1.34 trillion yuan on Tuesday. The dollar slipped to $1.12 for every euro.
The devaluation of the Chinese yuan has huge implications for rest of world demand and commodity prices but it was too early to judge what is happening with the Chinese currency policy, New York Fed President William Dudley said. The composition of that basket is secret, but the dollar appears to dominate it, which means the yuan rose even as currencies of other developing countries fell.
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Daimler and BMW declined 4 percent, while Volkswagen dropped 3.4 percent.
