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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General

Chinese Whispers – Yuan will it end?

The big news last week was a surprise move by the People’s Bank of China to devalue their currency by more than 4% over the week. It proved to be a case of “reverse all engines” last Tuesday after China announced a record 1.9% devaluation of the official Yuan reference rate – an adjustment described by the People’s Bank of China as a one-time event, but clearly viewed by the market as possibly the start of a trend. This view proved to be correct as a further 1.6% devaluation was announced a day later and another 1.1% the day after, with China’s actions being felt across global financial markets.

Equities did not like the possibility of a currency war, ending the week lower pretty much across the board – except in China of course. Bond yields were generally lower as they mulled the possibility of the US Federal Reserve postponing its first rate hike given the China news. Both hard and soft commodities were lower, with crude oil down sharply (to a six-year low) and the metals followed, however gold actually rallied, possibly on safe-haven buying.

On interest rates, given the downside to Chinese economic growth, financial markets continue to expect one more rate cut from the RBA, however as is the case with the US first rate hike, the timing of any move is still uncertain. However, the RBA Assistant Governor Philip Lowe gave a speech on the property market last week where he highlighted the central bank’s concerns regarding house and land prices. He emphasised the risks of rising prices being driven higher by a rapidly growing population and limited housing supply, adding that “many households have pulled back on spending and the RBA is mindful not to spark a spending boom with its interest rate settings”. The speech gave me the impression that he supports a view that rates are likely to be on hold.

Source: Rural Bank

 

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