Fx: China Devalues Yuan, Greece Deal Boosts Euro
Chinese exporters have come under pressure in recent months through the strength of the Chinese yuan, which has led to concerns over the overall well-being of the Chinese economy.
Tuesday, August 11, 2015 - 00:00
Beijing responded early on Tuesday by devaluing its currency against the US dollar to its lowest rate in close to three years. The People’s Bank of China manages the exchange rate of the Chinese yuan by setting an official midpoint against the US dollar, against which the currency is allowed to fluctuate up to 2% on any given day. The midpoint has now been set at 6.2298 to $1, weakening the yuan around 1.9% from Monday’s midpoint of 6.1162. The move has undermined many South East Asian currencies, including the Singapore dollar, which fell more than 1% against the US dollar. As well as giving Chinese exporters a boost, the move should conversely make prices more expensive for domestic importers, potentially harming those with strong trade ties with China. Consequently, the Aussie dollar also slid sharply, weakening 1.3% against the US dollar.
The euro has been boosted by positive developments regarding Greece’s bailout. The European Commission announced that a debt deal has been agreed in principal with Greece that is now subject to parliamentary approval. If the agreement is supported by the Greek parliament, it would release €86 billion of funds over the next three years, which would allow the country to meet a debt repayment of €3 billion to the ECB that is due on August 20. EUR/USD rose 0.51% in early trading to 1.1076, an impressive movement for the euro given the strength of the US dollar against most other currencies today.
USD/CAD rose 0.63%, the Loonie weakening after weaker-than-expected Canadian housing data. Housing starts fell to an annualized pace of 193,032 in July, undershooting expectations for 195,000, while June was revised down slightly from 202,818 to 202,338. The only province showing a gain was British Columbia (+4.7%), while Ontario (-13.7%) and the Atlantic region (-13.8%) showed sharp declines. Some of the volatility here will have come from a slowdown in the unpredictable area of condo construction, shown by the 8.2% decline in multi-family units, but the softness of the report counts as a negative sign for the Canadian economy nevertheless.
The strength of the US dollar has been a concern for US exporters for some time now and the surprise move by the Chinese central bank has exacerbated worries over the future overseas performance of large multinationals. Mining and construction equipment maker Caterpillar ($CAT) led the declines in the Dow Jones with a 2% drop in its share price, and the leading stock indices were all in the red in early trading. Shortly after the opening bell, the Dow Jones was down 160 points or 0.91%, while the broader measures of the S&P 500 Index fell 0.74% to 2088.6.
Those declines came despite a rebound in second-quarter productivity. Non-farm productivity was +1.3% from the first quarter. The Q1 change was revised up to -1.1% from the -3.1% that had originally been reported.
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