What’s happening with the Chinese Yuan?
When the People’s Bank of China devalued their currency by 2%, there was an immediate market reaction. Some other Asian currencies quickly followed—the Singapore Dollar, the Malaysian Ringgit. There was discussion of an impending currency war. Stock markets around the world tumbled.
One month chart of Asian Currencies: Aussie Dollar (orange); Korean Won (red); Chinese Yuan (blue); Singapore Dollar (green); Malay Ringgit (yellow). Source: Bloomberg
But I all I could think of was the Peggy Lee song from the ‘60s: “Is That All There Is?” I used to run a bank treasury in North Africa where exchange rates were managed. The central bank would regularly intervene in the marketplace depreciating (and appreciating) their currency—often around scheduled debt payments. Five and even ten percent adjustments were common.
Apart from hurting a few aggressive forex trader’s though, the immediate effects weren’t very dramatic. Longer-term, perhaps a few more European tourists booked beach vacations on Africa’s northern coast. And there was no currency war between Tunisia and Morocco and Egypt.
China’s economy has been slowing for years. But their currency has been set higher and higher, in part to counter claims that they were dumping their products on their trading partners. A weak economy usually leads to a weak currency, when the exchange rate is set by the market. Since China has a managed forex regime, eventually its money had to catch up with where the market would have taken it. By lowering their exchange rate, they can stimulate their economy without encouraging speculation in the stock market.
So don’t get too worked up about a 2 or 3% move. As Peggy Lee sings, “If that’s all there is, then let’s keep dancing.”
Douglas R. Tengdin, CFA
Chief Investment Officer