China’s devaluation of its currency signaled growing concerns of slowing growth in China and the world economy. Yesterday, Wall Street reacted negatively to the move by the People’s Bank of China (PBOC).
US stock markets fell while at the same time boosted the demand for safe haven Treasury debt. Commodities were also seen tumbling from daily highs.
China have said that there is no basis for a sustained depreciation of yuan give the current global and domestic economic conditions and they have stated their belief that the daily volatility in yuan will steady after a short period of time as participants grow accustomed to the new system.
The devaluation of its domestic currency by the PBOC by almost 2% which is the largest 1 day adjustment on record. The PBOC yuan reference rate was set at 6.3306 versus the prior close of 6.3231.
Deutsche bank believes that Yuan devaluation poses a number of headwinds for the metals. They believe that the 2% devaluation of the Yuan is faily limited on its own but if the trend continues, the bank sees 4 headwinds.
They believe that with the devaluation of the yuan, it would mean that it would be more expensive for China to import its metals. China accounts for 45 to 50% of global metal demands. With imports being more expensive, China is expected to depend more on its local domestic supply, especially in commodities such as coking coal and zinc.
China is also a growing exporter of its commodities and some are in oversupply. This includes metals such as aluminium, steel and stainless steel. These exports will be more competitive now as the yuan is being devalued.
The developments in Yuan devaluation spells bad news for the Australian currency as Australia depends a lot on China to import raw materials and commodities that it produces. Australian commodities would now appear more expensive to China and this means that Australia might see a dip in its export numbers.