Mercado Released [17 August 2015]: THE CHINESE YUAN

China sent shock waves through the market on Tuesday as it took steps to boost the economy by devaluing the currency by the most in two decades. The central bank cut its daily reference rate by 1.9% which caused the currency to weaken. The move had ripple effects across the globe as world markets posted lower returns, with companies who depend on Chinese support being the hardest hit. Beijing officials took these drastic measures in order to boost their level of exports whilst at the same time this would dull their import level. Economists also feared that this move would spark a currency war. China’s main trading partners, including the likes of South Korea, Vietnam, Taiwan and Malaysia, may try to hold on to their competitiveness by pushing their currencies lower. Emerging markets seemed to bear the brunt of the devaluation, with the MSCI Emerging Market index dropping to an almost 4 year low. The index is now sitting in bear market territory, having lost about 20% since its peak in September 2014. Emerging market currencies were also hit, with a number of currencies dropping to multi-year lows. A weaker yuan will also decrease Chinese demand for commodities which will have far reaching effects. Fears were eased towards the end of last week, as the central bank in China raised the value of the yuan by 0.05% against the US dollar. Despite the slight uptick in the currency, analysts feel that the only way that China can lift its economy is by further declines in the exchange rate. It is likely that the Chinese currency will fall at least 10percent.

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Week 34 2015