Renminbi devaluation continues

August 12, 2015

The renminbi has been one of the most highly controlled currencies in FX and had a quasi-peg against the dollar for some time, but just as we saw from the Swiss National Bank earlier in the year, when economic conditions shift, action has to be taken to adjust the value of a currency to take it to a fairer value. Such moves are usually in the interest of your own domestic economy and since China has been slowing rapidly for years against the backdrop of a slower global economy, it’s little wonder the data has been disappointing and the PBOC has been upping the ante on the monetary stimulus front. These fundamentals would cause any free floating currency to fall in value, so it should not come as a surprise to see the devaluation occurring and further weakness could follow as China attempts to give provide its exporters with a more competitive environment. This move is impacting risk assets due to the unpredictability of the PBOC’s action and as it will have a knock on deflationary impact for China’s big trading partners. The FTSE 100 is due to open lower by some 50 points and at the time of writing the Dow Jones is being called to open over 100 points in the red as companies that are reliant on revenues from China will be shunned by investors for the second day in a row.

Whilst the headlines and focus is on China this morning we must also give attention to the UK where unemployment data is due to be released at 9.30 UK time. The unemployment rate is due to remain unchanged at 5.6% and average earnings remain at 2.8%, where anything stronger could give sterling a lift following some recent weakness especially against the euro.

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