Currency Market Analysis

Aug 11, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar weakened to fresh August lows against the euro and a currency basket, but exploded to multiyear highs against its Chinese counterpart after Beijing announced a surprise devaluation of its currency, the yuan or renminbi. China reportedly made the move to cheapen its currency to allow market forces to play more of a role in the traditionally tightly managed currency. The yuan responded by sliding nearly 2 percent against the dollar, hitting its weakest level in nearly three years. China’s unexpected devaluation comes at a time of increased concern over the health of the world’s No. 2 economy, following poor trade data over the weekend and a steady slowdown in growth over the last several years. Currencies with close trade ties to China fell in sympathy, knocking the Aussie, kiwi and loonie lower. In the day ahead, the dollar should take additional cues from U.S. labor cost and productivity data.


A surprise move by China to cheapen its currency amounts to a price drop and a better buying opportunity for businesses with exposure to the Asian currency. The CNY fell nearly 2 percent in the wake of Beijing’s currency devaluation. Although China reportedly acted to allow its currency to reform more in line with market forces, the surprise decision can also spell a little relief for the nation’s exporters, a leading growth engine. As for broader market impact, the upward pressure China’s action exerts on the dollar could impact the timing of a Fed rate hike since the strong dollar has weighed on both growth and inflation in the world’s biggest economy.


The euro notched new August highs against its U.S. counterpart as China’s move to cheapen its currency fanned worries about global growth, triggering an unwinding of carry trades funded with the low-yielding single currency. The euro’s resilience of late doesn’t appear convincing beyond the short run after German investor optimism unexpectedly darkened in August, sliding for a fifth month in a row.


Sterling was little changed though on fragile ground on the eve of crucial U.K. jobs data. Markets lately have taken to scaling back expectations for the Bank of England to lift rates after last week’s so-called ‘Super Thursday’ ended in surprisingly dovish fashion, showing only one central banker voted for an immediate rate hike. Britain’s rate debate is sure to be stirred anew Wednesday in important unemployment and wage growth data.


The loonie was back underwater, along with its commodity rivals from Australia and New Zealand, a day after it logged its best single day rise all summer, gaining 1 percent Monday against its U.S. peer. A weaker greenback and a jump in oil had lifted the loonie. However, commodity currencies bore the brunt of China’s devaluation which triggered fresh concerns about growth in the world’s second biggest economy. Canada housing starts slowed more than expected to a 193,000 annual rate in July.


The dollar was mixed but generally weaker as China’s currency move laid down another potential obstacle to an imminent Fed rate hike. Not everyone is on board with the notion the Fed would boost rates at its coming meeting in mid-September, with economy continuing to flash mixed signals. Data today showed that American workers grew more productive in Q2 while labor costs rose 0.5 percent.

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