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Tuesday, August 6, 2019

China Yuan Devaluation and Its Impact

China’s currency broke through the psychologically important level of 7 yuan to the dollar, prompting President Trump to accuse Beijing of manipulating its currency .

PBoC said the currency’s slump was “due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China,” the People’s Bank of China said in a statement.

Currency weakness is a textbook response to tariffs being imposed on a country’s exports but do not expect a repeat of Monday’s large one-day depreciation because devaluation will hurt both countries as imports becomes more expensive for chinese companies.

Monday’s move should be seen as a warning shot , its more likely the PBoC will be to allow a gradual (2018-style) depreciation in response to the heightened tariff threat given that global trade and manufacturing are already considerably weaker than a year ago.

The other smaller Asian currencies will also weaken in the wake of the yuan . The weakening of the yuan will be also post as a tailwind for commodity prices Historically, turning points in the CNY/USD exchange rate have also coincided with turning points in commodity prices. This blog expect commodity prices to be soft going forward to the end of the year.
All posts and charts are for educational and illustration purposes only

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