{"id":76853,"date":"2015-08-14T04:17:30","date_gmt":"2015-08-14T08:17:30","guid":{"rendered":"http:\/\/countingpips.com\/?p=76853"},"modified":"2015-08-14T07:30:00","modified_gmt":"2015-08-14T11:30:00","slug":"making-sense-of-chinas-currency-devaluation","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/08\/making-sense-of-chinas-currency-devaluation\/","title":{"rendered":"Making Sense of China\u2019s Currency Devaluation"},"content":{"rendered":"
August 14, 2015<\/div>
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By WallStreetDaily.com<\/u><\/a> \"Yuan<\/p>\n

By Alan Gula<\/a>, Chief Income Analyst <\/em><\/p>\n

Earlier this week, two massive explosions rocked the Chinese port city of Tianjin. It\u2019s said that the larger explosion was equivalent to over 20 tons of TNT being detonated. The blasts were so large that seismic activity was registered around 100 miles away.<\/p>\n

The exact cause of the explosions is unknown, but other shocks emanating from China<\/a> have clearer triggers.<\/p>\n

On August 11, 2015, China devalued its currency, the renminbi (yuan), by 1.9%. It was the currency\u2019s biggest one-day drop since 1994.<\/p>\n

It didn\u2019t stop there, either. At one point the following day, the yuan had cumulatively lost as much as 3.9% of its value against the dollar. Policymakers in China seem to be following through on their promise to allow the market to play a bigger role in determining the exchange rate.<\/p>

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\u201cA fixed exchange rate looks stable, but it hides accumulated problems,\u201d noted Yi Gang, Vice Governor of China\u2019s central bank.<\/p>\n

China doesn\u2019t have a fixed peg, but it does heavily manage the yuan\u2019s level relative to the U.S. dollar. The chart below helps us put the devaluation into perspective. The y-axis has been inverted so that a rising line shows yuan strength.<\/p>\n

\"U.S.<\/p>\n

As you can see, China allowed the yuan to significantly appreciate against the dollar from 2005 up until the credit crisis. The fixed peg was reinstituted from mid-2008 until mid-2010. Then, the yuan began a slower appreciation, which culminated in early 2014.<\/p>\n

So, the yuan\u2019s relatively small recent devaluation has only given back a small portion of its longer-term appreciation. That said, we shouldn\u2019t downplay what\u2019s happening right now.<\/p>\n

The U.S. dollar bull market has really forced China\u2019s hand. The dollar has been very strong over the past year against virtually all global currencies. Therefore, the yuan has been dragged higher. With a strong currency, China has lost some of its export competitiveness. China has also been burning through foreign exchange reserves to keep the yuan at a level above where it would naturally be.<\/p>\n

Given that China\u2019s economy is slowing, its exports are flagging, and its speculative bubbles<\/a> are collapsing, the move wasn\u2019t completely unexpected. Plus, an increasingly market-driven exchange rate will pave the way for the yuan to enter the Special Drawing Rights (SDR) basket.<\/p>\n

Nonetheless, the market seemed to be surprised by the devaluation. Global equity markets dipped and the U.S. 10-year yield declined all the way to 2.05%.<\/p>\n

China\u2019s move has sparked fears that a new wave of deflation will wash over the world. A weaker yuan will also help boost China\u2019s exports at the expense of other nations. Koichi Hamada, an adviser to Japan\u2019s Prime Minister, went so far as to say that Japan can offset the yuan devaluation with monetary easing.<\/p>\n

Indeed, it\u2019s clear to see why there\u2019s a risk of escalating competitive devaluations or \u201ccurrency wars.\u201d<\/p>\n

For individual investors, it\u2019s important to keep everything in perspective. Just a little while ago, Greece and Europe were roiling the markets. Now, it\u2019s China\u2019s turn. Soon, there will be something else.<\/p>\n

If you\u2019re getting spooked by these news-driven stock market plunges, only to buy higher after a fierce rally, you\u2019re doing it wrong. Many traders and investors are simply getting whipsawed by the volatility. Meanwhile, the S&P 500 has effectively gone nowhere since the Fed\u2019s latest quantitative easing<\/a> (QE3) program ended.<\/p>\n

This is why everyone should hold globally diversified portfolios of stocks, preferred stocks, bonds, and real assets. There are going to be more (and much larger) disturbances down the road, and their timing is uncertain. By being properly diversified and intelligently taking on risk, you\u2019ll protect yourself from the market shocks and volatility storms coming our way.<\/p>\n

Safe (and high-yield) investing,<\/p>\n

Alan Gula, CFA<\/p>\n

Editor\u2019s Note:<\/strong> Speaking of protecting yourself, we\u2019re on the verge of launching a one-of-a-kind research service that will show you how to navigate today\u2019s treacherous environment. It\u2019s called The Shockproof Investor<\/em>, and it\u2019s designed to help mitigate risk while taking advantage of current market conditions. You can sign up here<\/a> to reserve your spot (for free), and we\u2019ll send you everything you need to know as soon as it\u2019s ready.<\/p>\n

The post Making Sense of China\u2019s Currency Devaluation<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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By WallStreetDaily.com By Alan Gula, Chief Income Analyst Earlier this week, two massive explosions rocked the Chinese port city of Tianjin. It\u2019s said that the larger explosion was equivalent to over 20 tons of TNT being detonated. The blasts were so large that seismic activity was registered around 100 miles away. The exact cause of […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-76853","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/76853","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=76853"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/76853\/revisions"}],"predecessor-version":[{"id":76867,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/76853\/revisions\/76867"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=76853"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=76853"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=76853"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}