Shock waves from the rumbling Renminbi
China sent shock waves through global commodities, interest rates and stock markets last week when it undertook the biggest devaluation of its currency in almost two decades.
However, the devaluation was actually not that big – with the People’s Bank of China devaluing by only 1.9 per cent.
So why did the market react so strongly?
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Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
Published on 19 Aug 15
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China sent shock waves through global commodities, interest rates and stock markets last week when it undertook the biggest devaluation of its currency in almost two decades.
However, the devaluation was actually not that big – with the People’s Bank of China devaluing by only 1.9 per cent.
So why did the market react so strongly?Sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
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However, the devaluation was actually not that big – with the People’s Bank of China devaluing by only 1.9 per cent.
So why did the market react so strongly?
The weekend before announcing the currency change, China’s export data was also released. It showed a sharp drop in July. This gave the impression that the PBoC might be seeking to increase the country’s competitiveness by devaluing the currency.
Concerns intensified further over the following two days when the PBoC raised the daily reference rate again as it began to implement a more market-determined framework for the currency. This had been requested by the IMF in order to allow the renminbi to become a reserve currency. Not surprisingly, the IMF has come out supporting China’s move.
In the scheme of things, the 3 per cent drop in the currency is relatively small for a developing country trying to increase its export competitiveness. And as such, we think the market will calm down and realise it’s not linked to a strategy of major competitive depreciation.
Against the backdrop of this volatility, gold had a strong week as did Iron Ore. On the flipside, it was mostly gloom for other industrial commodity markets such as Copper and also for Oil, both of which hit six-year lows.
European equities sharply underperformed their US counterparts, in part thanks to the Euro rising more against the Renminbi than the US Dollar.
Adding fuel to the fire was the release of provisional euro-zone GDP data, which revealed that growth lost some pace in Q2 for Europe. Indeed, the Euro-zone region expansion was weaker than the consensus forecast and also the previous two quarters.
China's currency move also prompted speculation the US Federal Reserve might hold back from raising interest rates next month. However, encouraging economic data released on Friday including industrial production and consumer confidence were better than expected putting an increase in rates in September for the US back on track