The Chinese Yuan in Continuous Decline
GBP/USD is currently trading at about 1.5578 GBP/EUR is trading at about 1.4065, but it is not the movement of the GBP/USD or GBP/EUR that’s really gathering the most market attention at the moment, it continues to be the declines of the Chinese Yuan. Overnight, once again another 1.6% move, falling on from a 1.9% move the previous night, a devaluation of the Chinese Yuan.
First off, a movement in the reference point by the People’s Bank of China and then obviously a big shift in the offshore Chinese Yuan traded out of Hong Kong, meaning the People’s Bank of China had to move its reference rate lower. This is the biggest move we’ve seen in decades as I’ve mentioned yesterday. We’ve seen a 7% devaluation of the Chinese Yuan offshore in the past two sessions. This is big, big news.
Obviously, moving forward there’s prospect for increased export growth out of China, with some people still talking about a currency war. This isn’t a devaluation in the form of a currency war you’ll have to say, it is moved by a 7% offshore typical devaluation and in currency war terms maybe 10%/15% or even 20%. We’ve seen the Russian Ruble for example fall by around 40% over the course of the past 18- months as a result of the problems within Ukraine. So, we can’t really talk about currency wars there.
Where does it end? It’s going to strengthen the United States dollar, it is going to strengthen the Euro, and Sterling is also having a good day as a result of people just moving into safer havens. Sterling may also benefit from the UK unemployment, which is billed for 09:30 BST today. We’re looking for the rate of jobs growth just to slow a little bit. We’ve seen surveys in the manufacturing, services and construction sectors that while jobs are being added, the rate is a little bit slower than the beginning of the year and that’s likely to feature through the official figure later on today. It’s all about China, as the Yuan continues to fall.
The currency decline in China had a direct effect in the oil market, as a weaker Yuan will increase the cost of import and hinder the demand for crude.
A senior investment strategist in Seattle at U.S. Bank Wealth Management, Rob Haworth, whose firm oversees $128 billion of assets noted that, “The Chinese news just adds to concerns we already had. Nobody is excited about the prospects for demand growth and excess supply isn’t going away. Prices will probably drop below $40 before this is over.”
Similarly, we have seen oil reserves out of OPEC countries in continuous flow leading to an excessive flow in oil supply, thereby forcing in an additional pressure on the price of oil. In view of OPEC data, there is a 32,300 barrels per day increase in July leading to an average output of 2.86 million barrels per day in Iran, making it the highest since June 2012.
The September WTI delivery dropped by $1.88 to $43.08 a barrel on the New York Mercantile Exchange, making it the lowest settlement since March 2009.