The markets have commenced the second trading day of the week with an unexpected surprise after the People’s Bank of China (PBoC) shocked the markets overnight by devaluing the Yuan in a move that has blasted the USDCNY from 6.21 to 6.37 in a couple of hours.
China has acted swiftly to devalue the currency in another attempt to reinvigorate its declining economic momentum, which is highlighted by continually weaker economic data being announced on a frequent basis. The export figures out of China over the weekend were even worse than expected, and it is quite clear that this move has been made to inspire stronger export competiveness.
It was already well-known that the economy was suffering from declining inflation and reduced domestic momentum, but the export numbers highlighted that there is slowing demand for Chinese goods and that the economy is also exposed to weakness outside of mainland China. This would have alarmed both the PBoC and Beijing government because GDP was already appearing vulnerable to falling below the 7% government target before the end of the year, with declining exports showing that the downside pressures on the economy are intensifying. Make no mistake, this 7% GDP target is absolutely critical, and both the PBoC and Beijing government will do whatever it takes to defend this benchmark target.
For those wondering if this move is going to be successful when it comes to reinvigorating the economy, it is far too early to tell but what I would say is that the move to devalue the Yuan shows that China will adapt innovative measures to reinvigorate its economy. Due to economic weakness elsewhere being a contributor behind the weaker export numbers, and the correlation being strong that these economies have also seen their currency weaken, China might need to devalue its currency even further if this move does not improve economic data. Either way with stagnant inflation and economic data consistently suggesting that the China economy is entering a deeper downturn than what was previously expected, we need to prepare ourselves for waking up to more similar headlines regarding China throughout the second half of this year.
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Elsewhere, the GBPUSD has bounced sharply away from its monthly low at 1.5424 and rebounded towards 1.5605. The GBPUSD bulls are attempting to recover momentum and regain control of the pair after it encountered heavy selling pressures late last week. Although investor sentiment towards the Pound took quite the hit after the Bank of England (BoE) outlined returning concerns over currency appreciation and inflation risks following the resumed selling in commodities, there is still some potential for the GBPUSD to continue advancing. Investors will be looking ahead to Wednesday’s UK jobless claims data and optimistically hoping that the consistently strong UK economic outlook raises sentiment towards the Pound once again, but it will require an impressive piece of data to send the pair any higher than 1.56.
What would really encourage the GBPUSD bulls to charge forward is if the jobs report shows further improvement in wage growth because this would enhance expectations that the extra disposable income can be filtered through the UK economy and improve inflation expectations. Ultimately it is the alarmingly weak inflation readings that are continuing to haunt investor attraction towards the Pound because if inflation readings didn’t take such a nosedive following the dramatic tumble in commodity prices, the BoE would have most likely began raising UK interest rates by now. From an economic standpoint and moving away from inflation readings, the UK economy is ready for the BoE to begin raising interest rates.
Follow Jameel on Twitter @Jameel_FXTM
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