Forex Trading Implications Of The Yuan Devaluing?

On the 11st, 12th and 13th of August the Chinese government dropped the fix point of the yuan by 1.9%, 1.6% and then 1.1% . While graphs just focusing on the yuan may seem alarming the truth is most of countries have been devaluing their currency for some time. That makes these changes such big news is they are the biggest changes to occur in the past decade for the Yuan.

There are also those floating currencies such as the AUD which have been depreciating for some time. The graph below shows how in 2015 the AUD has reduced by over 10% to the USD while the yuan was steady until this week despite declining economic figures.

China vs Australia Currency

 

Below are the ‘top 3’ questions and answers to understand the Yuan and the recent movements.

1) What started the Yuan’s devaluation?

Every day in the morning the Chinese government posts an announcement of Yuan rate against a pre-set basket of currencies.. On Tuesday the 11th of August they announced the first drop followed by two further announcements on Wednesday and Thursday. It’s critical to note that unlike most currencies, the Chinese government doesn’t let market mechanisms move it’s local currency against others. It’s critical to note that the Yuan isn’t pegged to the U.S. economy but rather several other currencies which the Chinese government won’t disclose. This makes forex trading difficult for this currency.

The Yuan

2) What Is the Motivation Behind The Move?

Within China, investors have become concerned with the local economy and have increasingly invested money overseas in ‘safe-heavens’ such as the Australian property market. When such currency moves overseas the normal market movement would be a depreciation but as the Yuan is pegged to a basket of currencies there have been no movements. It could be argued that the Chinese government has therefore tried to make the currency adjust to a market rate, especially when considering the rising U.S. dollar.

Another viewpoint is that China is just trying to boost it’s economy which has slowed down. A low Yuan is a key reason why China has grown so rapidly over the past 20 years and by reducing the rate their exports become more competitive again. With exports dropping 8.3% last month (July) you could understand the need to prop this up.

The Yuan Devaluation

3) Why Have Investors Become So Nervous?

As stated earlier, the change in the Yuan is the biggest in over a decade. Many investors feel that something is scaring the Chinese government that may not be known to the wider population such as growth reducing at rapid rates. When forex trading, individuals naturally don’t like surprises or information to be only know by some parties.

Many countries that export to China may have their forex markets hit or their local companies performance impacted as their exports become more expensive to the country. Some may even react by executing currency market mechanisms to reduce their currency as well. A currency battle has long been a fear for economists since it occurs frequently within the Euro zone over the past decade.

Currency Battles

The final issue of course goes back to the U.S.A. where it becomes increasingly difficult now to raise rates despite their economy growing. Keeping rates at historically low levels can lead to inflation and risks but increasing them will further increase the local currency. When forex trading individuals prefer near certainty from the US Fed will now need to guess what they will do in September as this will have the largest impact on U.S. Dollar. Mechanisms such as guaranteed stops or no negative balance features from the best forex brokers may need to be considered when trading with such uncertainty.

Some Economic Impacts Of The Yuan Devaluation For Aussies

i) Will Low Cost Chinese Products Become Cheaper?

The original stables of Chinese imports to Australia from clothing to toys are unlikely to become cheaper. This is due to a combination of a depreciating Australian dollar and the fact that there are already extreme price pressures on China from increasing labour costs to competition from other countries. Also, a lower Yuan will mean importing raw goods for these products will also become more expensive.

ii) Chinese Smartphones Could Make Their Mark!

Locally made Chinese smartphones (for example Huawei & Xiaomi) are starting to creep into the domestic market based on their low price yet respectful specifications and displays. The lower Yuan will only make these mobile phones more competitive and it’s expected that more aggressive market share tactics will occur in Australia as well as developed countries. In the near future, these brands could become as well known as Samsung!

Chinese Smartphones

iii) Tourism Could Drop (or maybe Australia’s neighbours)

The Yuan devaluation will make Australia seem more expensive but in reality, the huge drop in the Australia dollar on the year means that compared to 2013 Australia is considerable cheaper. Rather then tourism in Australia dropping from the Chinese, instead their cheaper neighbours such as Thailand or Hong Kong which have been ‘low cost’ destinations may see a bigger downturn. With countries such as Thailand expecting 66% of their economic growth to come from Chinese tourism, this could now be under threat.

iv) Some Discretionary Imports May Be Impacted

There are many imports that the rising middle class of China will always demand irrelevant of the price such as premium seafood and meat. Some cheaper staples such as bananas though could be impacted if Chinese can easily switch to cheaper locally made products. Australia is expected to actually be impacted less than countries such as the Philippines that solely export cheaper produce to China.

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