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How Does the Yuan Move Impact the Fed?

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How Does the Yuan Move Impact the Fed

How Does the Yuan Move Impact the Fed?

Aug 12 2015, 01.49pm GMT

STOCK.com

The double devaluation of the yuan both on Tuesday and on Wednesday by the People's Bank of China, has raised speculation that the move could delay the first U.S. rates hike in almost 10 years.

The Chinese currency recorded its biggest loss in two decades following the unexpected moves with the dollar (USDCNY, +0.9881%) now costing 6.44 yuan, according to the latest currency quotations. Regular intervention by Beijing in the foreign exchange market had kept the yuan trading in a tight range in recent months.

The move is certain to create increased volatility in global forex trading with fears that this could be the first salvo in a renewal of the currency wars. Analysts fear that the People Bank of China has further unexpected moves up its sleeve.

The U.S. Federal Reserve finds itself in the horns of a dilemma with certain fundamentals pointing to the need for an early hike in the interest rate while others, including the devaluation of the yuan, emphasize the need to delay any decision to increase the rate beyond September.

While the U.S dollar strength has taken its toll on export numbers, a rates hike with a view to stimulating the economy would, in all probability, strengthen the dollar further. Coupled with a depreciated yuan, U.S. products would become even more unattractive from a cost perspective than they are currently.

MarketWatch obtained a number of initial analyst assessments of the devaluation. Excerpts from some of the assessments follow.

Craig Erlam, senior market analyst at Oanda said, “The question now is whether other central banks will follow suit and devalue their own currencies in some way in an attempt to ring-fence their own export markets, something that could further harm U.S. companies.”

Nour Al-Hammoury, chief market strategist at ADS Securities said, “What is of interest is how the U.S. will react to this move. It will certainly cause [Fed Chair] Janet Yellen and the Fed more problems and could possibly kill off a September rate hike, as any further gains by the U.S. dollar could cause more problems for the U.S. economy …it is clear that the ‘currency war’ is back which will make the next few weeks very interesting.”

Meanwhile, a different perspective came from Holger Schmieding, chief economist at Hamburg based Berenberg, who said, “How important is this? For China it matters a lot. For global currency markets, it is a major change. But for the global economy, the impact should be pretty small … all in all, this may be a step for China to make its currency a little more flexible, and manage it more relative to a genuine basket of other currencies, rather than mostly relative to the U.S. dollar. It introduces an additional volatility into global FX markets. However this adjustment does not affect the outlook for, say, European exporters to China very much.”

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