The big news over the past 24 hours remains the PBoC devaluation of the CNY. Overnight the PBoC were at it again, this time devaluing the CNY by 1.1% taking the USDCNY to 6.3850 at the time of writing. The PBoC have denied claims that they intend to weaken the CNY by a total of 10% to support their exports and economy as a whole. Obviously the recent interest rate changes they implemented simply did not do enough to stimulate the economy so they did the next best thing and devalue their currency. The USD and AUD (especially) have been hit hard of course as a result and no doubt the US authorities are not sleeping well. While the Chinese have reduced their US Treasury holdings by a “mere” $300bn recently to a eye watering $3.7trn, the US in trying to avoid a currency/trade war, will have to tread carefully so as not to “upset” the Chinese. Not for one second do I think the Chinese would rattle the US by selling or threatening to sell their Treasuries because that will create a financial meltdown which will do more harm than good. I imagine the US are going to have to accept the PBoC’s decision because a strong Chinese economy helps everyone. As things stand the US economy is continuing to grow unaided and obviously the Chinese are trying to get their economy to do the same. Having initiated QE, reduced interest rates and now devalued their currency the Chinese will now hope these 3 in conjunction will accomplish the job of stimulating the economy.
Stocks have rebounded this morning after the PBoC stated there was no basis for any further devaluation of its currency. Which makes me wonder why the PBoC would say the country’s strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves provided “strong support” to the exchange rate. But even if the PBoC succeeds in halting the appreciation the CNY for now, weak July economic data and expectations of more interest rate cuts later in the year are likely to fuel expectations that the PBoC could actually allow the CNY to slip further. No doubt this story still has legs and in the coming weeks as we draw closer to the 17th September FED policy decision day, speculation will be rife as to whether they will indeed pull the trigger and raise rates. While the US are no doubt annoyed at the PBoC’s decision to manipulate their currency, the question will be whether they fire one back at the Chinese by raising rates and thus cementing their 1st place status (of raising interest rates which confirm their growth status).
Greece (remember them) and her creditors finalised a new multi-billion EUR bailout enabling Greece to meet a crucial repayment due to the ECB later this month. Kinda like borrowing from Peter to pay Paul….needless to say the agreement at least keeps Greece out the news and thus the markets. Had it not been for the PBoC, no doubt this news would have made front page news. Now it is relegated to somewhere in the business pages. Now you know how fickle and easily forgotten the markets can be regarding Greece. Still this is great news and hopefully the reforms that Greece has imposed will start to put Greece back on the EU map.
Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.
Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.
Follow our tweets @parityfxplc
Follow us on LinkedIn ParityFX Plc