Several times last week, the People’s Bank of China roiled global financial markets with its unexpected move to devalue the yuan. Last Tuesday, the central bank of the Asian country depreciated the currency by 1.9 percent—the largest move since 1994.
Although the PBOC claimed that this devaluation is only a one-time deal, it proceeded to lower the yuan’s value even further, devaluing China’s currency by a combined 4.4 percent. According to Chinese officials, the yuan will now be allowed to move in accordance with market forces.
The sudden move by the Chinese central bank to depreciate their official currency made investors and traders uneasy and shaken up, as the term “currency war” comes to mind. This is evident as all kinds of trading went berserk as a consequence of the devaluation.
In the global currency market, the euro initially declined and then rebounded significantly, adding 1.8 percent in the week’s trading. Currently, it is trading at 8-week highs. Similarly, the Canadian dollar initially performed poorly and then managed to bounce back to take some gains against the US dollar.
The countries that are closely related to the Asian country by regional trade, including New Zealand, Singapore, and Australia, all had their currencies decline. Some emerging countries were strongly affected as well. For instance, Indian rupee fell a whopping -2.3 percent against the US dollar through the course of the week.
Aside from the mentioned effects of China’s devaluation on the forex market, it appears like the most substantial impact was on the prices of commodities. A weaker yuan implies that imports are more expensive, thus stimulating buying from domestic Chinese producers of oil, base metals and other commodities.
Furthermore, traders also interpret the yuan’s depreciation as a sign that the government of the Asian nation is admitting that their economy is slowing. Hence, this led to a drop in WTI oil and copper prices.
WTI oil continued its worst summer in the history of trading to end up at $42.35/bbl. Meanwhile, copper was at its lowest price of $2.35 per pound.