• 5 hours Fake News Is A New Virus Without A Cure
  • 9 hours The Countries Hit Hardest By COVID-19
  • 11 hours China's $700 Billion Infrastructure Package Sends Copper Soaring
  • 12 hours Are Investors Ignoring The Largest Financial Risk Ever?
  • 1 day Americans Are Counting On Another COVID Stimulus Check
  • 1 day What's Next For Hong Kong?
  • 2 days Bitcoin Fails To Stay Above $10,000
  • 2 days Bill Gates And Big Oil Chase The Dream Of Nuclear Fusion
  • 2 days Top Jeweler To Use Only Recycled Gold And Silver
  • 3 days America’s Multi-Front Meltdown
  • 3 days Gold Up As U.S. Civil Unrest Escalates
  • 3 days How BlackRock Became King Of ESG Investing
  • 4 days Americans Don’t Care if TikTok Is A Security Threat
  • 5 days What’s Next In The Trump vs. Twitter Drama?
  • 6 days Escalating Tensions Could Crush $52 Billion China-U.S. Energy Deal
  • 7 days The Fed Is Printing Money At Unprecedented Levels
  • 7 days How Is The Real Estate Market Handling COVID-19?
  • 7 days Gold Flat As Markets Await Fed Chair Speech
  • 7 days What Is Day Trading And Is It Right For You?
  • 7 days Energy CEOs See Big Payouts Despite Oil Price Crash
Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Ashraf Laidi

Ashraf Laidi

AshrafLaidi.com

Ashraf Laidi is the author of "Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets" - Wiley Trading.

Contact Author

  1. Home
  2. Markets
  3. Other

PBOC Action to Further Divide the Fed

The 1.9% devaluation in the peg of the Chinese yuan is a balancing act between addressing the slowdown in exports and the economy, and stabilizing the risks of escalating capital outflows. In a nod to the IMF, China has altered the way it announces its daily fixing--the anchor price around which intraday fluctuations are permitted to move by no more than 2.0%-- by using the previous day's close instead of an arbitrary level set by the PBOC. This is no surprise to those who read us here 2 days ago.

Fortune Cookie

The decision to set the daily anchor, or central rate based on the prior day's close is a an important move towards a more market-based setting, which meets a key requirement before including the yuan in the basket of the IMF's Special Drawing Right--a foreign exchange asset created by the Fund for central banks to maintain reserves in a more diversified manner.


Falling Exports, Reserves & Growth

In terms of its current account, China's slowing growth has manifested itselfin the 9th consecutive monthly decline in imports (longest since 2008-9), the5th decline in exports over the last seven months and a 7% decline in China'scurrency reserves to a 2-year low. The situation had especially deterioratedafter the CNY rebounded in early March into early summer following the PBOC'sefforts to stem any capital outflows, which arose from the 3% decline betweenOctober 2014 and March 2015.

China Trade Balance, Imports % y/y and Exports % y/y


Implications for Fed Policy

Less than 24 hours after the US dollar sustained a notable sell-off followingremarks by Fed's Fisher highlighting weak inflation and throwing doubts overa September rate hike, the PBOC acted with a never-seen devaluation, which partiallyreversed yesterday's USD decline.

The plunge in commodities- led by the 30% decline oil since May--is widely seen as a cause of disinflationary pressures. Further devaluation from Beijing could be the coup de grace for commodities, thereby exporting deflation to the US and Europe.

At a time when several FOMC members were considering a rate hike as early as next month, China's devaluation further highlights the importance of low inflation as an obstacle to Fed tightening. The decision also complicates the task of those Fed members, aiming for September liftoff but without further USD gains.


Jackson Hole will be about inflation, not jobs

Considering the disinflationary US dollar and recessionary oil/mining sector,the question to raise rates this autumn should re-emerge at the Fed's August27-29 annual Economic Policy Symposium at Jackson Hole, where unsurprisinglythe topic of this year's conference will be "Inflation Dynamics and MonetaryPolicy", following last year's topic, which centered around labour markets. Fedchair Yellen will not be present at this year's conference, but the heated debatedabout the topic will not be absent, especially as it will take place 3 weeksdays before the Sept FOMC and 7 days after the latest Greece deadline.

We continue to expect no rate hike this year.

 

Back to homepage

Leave a comment

Leave a comment