China’s central bank surprised the markets by devaluing the yuan on Tuesday as the Chinese government seeks to boost the country’s exports. The yuan, which can only fluctuate 2% from its fixed midpoint, was devalued by 1.9% and the midpoint lowered to 6.2288 per dollar from 6.1162 per dollar. The People’s Bank of China also changed the way it sets the midpoint, which will now be based on market makers’ quotes and the previous day’s closing price, making the currency more market-orientated.
The devaluation is the latest attempt by Chinese authorities to boost the economy as previous efforts such as monetary and fiscal stimulus have only had limited impact and growth continues to slow. A sharp fall in July’s exports prompted the latest move, which has added to suspicions that actual economic growth is running below the official 7% rate.
The dollar, which recovered most of its gains from yesterday after sliding on Fed governor Fischer’s comments that inflation needs to rise to more normal levels before rates can start to increase, continued to firm in Asian trading on Tuesday. The rebound came after another Fed official, Dennis Lockhart, sounded more hawkish at a speech later in the day where he said that “the point of liftoff is close”, though he stated that any subsequent rises should be gradual.
The dollar moved higher against the yen and the Swiss franc during Asian trading, rising to 124.85 yen and 0.9820 francs in late session. But the Australian and New Zealand dollars took a hit from the yuan’s depreciation as the aussie and the kiwi plunged to 0.7326 and 0.6555 respectively against the greenback. The Australian dollar was hardest hit, falling by over 1% as business confidence data out earlier today showed sentiment falling from a month ago.
The Canadian dollar gave up some of Monday’s gains as Brent crude futures fell back below $50 a barrel. The greenback was briefly below the 1.30 level against the loonie but rose to 1.3059 in late Asian session.
The euro was off Monday’s highs but was supported by news that Greece and its creditors have reached a deal on the terms of the new bailout. With reports saying that the final amount of the third bailout could exceed the provisional figure of €86 billion, the timing should ensure that the deal gets the necessary approvals required before the August 20 deadline when Greece needs to make another repayment to the European Central Bank.
The single currency was trading at 1.0964 against the dollar in late Asian session, down from Monday’s high of 1.1041. It was also lower against the pound as it fell to 0.7047. Sterling was also down from its highs above 1.56 dollars but was slightly more resilient ahead of tomorrow’s unemployment and earnings data, as it slipped to 1.5556 dollars.
Tuesday is set to be another quiet day with the exception of the ZEW economic sentiment survey for Germany for August and the second quarter unit labor costs for the US, which is expected to show labor costs remaining unchanged over the quarter.
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