"No warning can save people determined to grow suddently rich" - Lord Overstone

  • 12 mins Tech Giants Rally Ahead Of Earnings Reports
  • 16 hours Global Debt Hits 225% Of GDP
  • 17 hours The World’s First Trillionaire Will Be A Space Miner
  • 18 hours How Student Debt Could Cause The Next Real Estate Crisis
  • 19 hours This $550 Billion Industry Is Betting On Bitcoin
  • 20 hours One Commodity Set To Soar On Russian Sanctions
  • 22 hours China’s New Car-Market Rules
  • 1 day Oligarch Risk: The New Red Flag For Investors
  • 2 days Five Things To Consider Before Investing In An IPO
  • 2 days Investors Bullish As Earnings Season Kicks Off
  • 2 days Nearly One-Third Of U.S. Lottery Winners Declare Bankruptcy
  • 2 days Is Facebook Still A Buy?
  • 2 days Will Blockchain Stocks Ever Bounce Back?
  • 2 days Geopolitical Tensions Fail To Boost Gold Prices
  • 2 days China's Economy Soars Despite Trade War Fears
  • 2 days The Biggest Threat To The Economy
  • 3 days What Does A Billionaire's Bucket List Look Like?
  • 3 days Is The Global Economy Growing Or Slowing?
  • 3 days A Sanctions War Could Cripple U.S. Corporations
  • 3 days British Pound Soars To Highest Level Since Brexit
Investors Bullish As Earnings Season Kicks Off

Investors Bullish As Earnings Season Kicks Off

The first round of earnings…

Oligarch Risk: The New Red Flag For Investors

Oligarch Risk: The New Red Flag For Investors

Investors are scrambling to diversify…

Ashraf Laidi

Ashraf Laidi

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

More Info

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