China’s recent two day devaluation of the Yuan has clearly put the markets on edge with questions doubting the Fed’s September rate hike plans. The move came as a surprise two days ago as economic data from China continued to deteriorate beside the fact that the equity markets in China had tumbled. In a bid to boost its exports, the current devaluation now poses a threat to the US Dollar, which is already stronger across the board and could therefore impact the US exports against a more competitive exports market from China.
Earlier today, there was speculation that the Yuan fix was further devalued as the USDCNH continued to rise. Overall, the US Dollar gained over 6% since the past three days, to settle for a 3.86% gain as of current price.
The Asian commodity risk currencies, namely the Aussie and the Kiwi came under intense pressure over the past few days but managed to stabilize since yesterday. The Aussie, which fell over -1.52% on the initial devaluation managed to cut its losses and closed yesterday with 1.04% gain. It was a similar story for the NZDUSD as well which managed to bounce back yesterday after briefly hitting a 12 month low in early Asian trading. Besides the Aussie and the Kiwi, other regional emerging market currencies in Asia also took a hit.
The single currency, Euro managed to gain in this turmoil, rising as much as 1.6% on a week to date basis. The Euro was also well bid as there was positive news from the Greece debt negotiations which cleared the way for a final vote from the national parliaments in Europe. The deal could see a third bailout being unlocked for Greece ahead of the August 20th repayments to the ECB.
The US equity markets initially reacted negatively to the Yuan devaluation news but pared their losses. However it wasn’t the same with the European equity markets. The DAX lost over -4.5% since Tuesday, falling from the highs of 11609 to close yesterday at 11043. The Dow Jones industrials dipped to 6-month low to test the 17200 level before easing back from the lows to settle higher at 17402.
The US Dollar Index, while surging higher on the news eventually fell from the highs of 97.30 to close yesterday at 96.33 as investors weighed the impact of the Yuan devaluation against a US Dollar which has gained in recent weeks on speculation for a September rate hike. The most recent unemployment report did not add much optimism to the speculators as the number of jobs fell below estimates, but was offset by an upward revision to the previous two month’s jobs numbers and the unemployment rate being steady at 5.3%
