| High | Low | High | Low | |||
| EUR/USD | 1.1033 | 1.0960 | USD/ZAR | 12.7780 | 12.6368 | |
| GBP/USD | 1.5603 | 1.5555 | GBP/ZAR | 19.89 | 19.69 | |
| EUR/GBP | 0.7074 | 0.7038 | USD/RUB | 64.34 | 61.83 | |
| USD/JPY | 125.08 | 124.52 | USD/ILS | 3.8218 | 3.7909 | |
| GBP/CHF | 1.5357 | 1.5284 | S&P 500 | 2,107 | 2,093 | |
| GBP/AUD | 2.1309 | 2.0968 | Oil (Brent) | 51.05 | 50.48 | |
In a move that has reverberated globally the Chinese central bank has devalued the renminbi by 2%. Quite the most significant move by China for 2 decades, most Asian currencies have weakened in response and resource rich countries with exposure to China are likely to do the same. Indeed there has been a substantial weakening of the Australian and New Zealand currencies already. It is well known that the growth rate of the Chinese economy has been decelerating for some time, and any pretence that this was due to the managed (and necessary) rebalancing of the economy from an export driven powerhouse to a more consumer driven domestically focussed structure was discarded ages ago. The trade data that was published late last week indicated falling exports and sharply lower import demand. One of the reasons that the commodity complex is in bear market territory has been the poor demand profile coming out of China and this will likely gain momentum with recent events. The flipside of policies that have resulted in the renminbi having a soft peg to the US dollar has always been a scenario where the greenback starts to trend higher. This was a problem in the Asian crisis in the late 90s and while steps have been taken by Asian mercantilists to learn from the previous crisis not all solutions have eliminated the risks of continuing such policies. Even as the euro and the Japanese yen have dramatically weakened against the dollar over the last year, they have weakened against the renminbi as well, the euro has fallen 10% and the yen 4% against the Chinese currency and surely some of the export difficulties facing Chinese companies relates to this. It’s hard to see how Chinese products can compete against higher quality, albeit more expensive, products from Japan and Germany except on price, and any erosion of that advantage was always likely to spell doom. The Chinese authorities have reached that conclusion and acted. Remember this is reputedly the largest economy in the world – certainly so in terms of purchasing power parity – there is surely some loss of face doing this, and it is a mark of how dire the situation must surely be for the authorities to sanction the move. I very much doubt that this action will be ignored by competitor nations, this is no butterfly wing fluttering, it is a dragon’s. More to come in the days ahead…
It’s been so unusual this year for good news to be coming out of Europe, but times are a-changing. Greece has agreed an outline debt deal with creditors – watch out for the detail though! This would be the 3rd debt deal for Greece, and we can only hope that three times is a charm, but don’t bet the farm on it – it still strains credulity to believe that the Greeks will ever be able to repay all that they owe, so this is more of a can kick. All we can hope for is that it is kicked far enough into the future for us to focus on other things. The euro and pound sterling have been creeping higher since the early afternoon yesterday on the back of the good news as have European equity markets. It is entirely possible that the environment going forward is going to be fantastic for European equities, but I have far less confidence in the euro. At the end of the day monetary policy in Europe will have to remain super loose, while the spectre of rising interest rates will continue to hover in the UK and US. This should be fertile ground for the euro to gently depreciate versus the other two currencies, but the path is never straight, and the devaluation in China has as yet unknown consequences.
The seeds for the next global economic crisis have almost certainly been planted, we just don’t know how long it will take for the trees to grow and cast their shadow over an unsuspecting world. We might look back and talk about the catastrophic effects falling oil prices are having on Venezuela, the dire economic data coming out of Russia, the delays implementing a coherent policy in Nigeria. We may focus on the more advanced economies and the normalisation cycle in the United States and the UK, none of us can truly know until it happens, but when the best of the good news is coming from Greece it makes me shudder…
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