The market will calm down after the biggest currency devaluation by China in almost two decades which has sent shock waves through global commodity, interest rate and stock markets, says George Lucas, managing director Instreet Investment.

“The 3 per cent drop in the currency last week is relatively small for a developing country trying to increase its export competitiveness,” says Lucas.

“And with the People’s Bank of China (PBoC) raising the daily ‘fix’ for Dollar/Renminbi by only 1.9 per cent, the market will calm down and realise it’s not linked to a strategy of major competitive depreciation.”

“The volatility has already begun to abate after Beijing allowed the currency to strengthen for the first time in four days on Friday,” he said.

There were signs the PBoC might devalue the currency to increase the country’s competitiveness when the week before China’s export data showed a sharp drop in July, said Lucas.

“That concern intensified over the following two days when the PBoC raised the daily reference rate as it began to implement a more market-determined framework for the renminbi which has been requested by the IMF to allow it become a reserve currency.”

“Not surprisingly, the IMF has come out supporting China’s move,” he said.

Lucas said China’s currency move prompted speculation the US Federal Reserve might hold back from raising interest rates next month.

“Concerns about deflation are receding with last week’s encouraging US economic data which included an increase in industrial production for July that was much higher than the consensus forecast.”

“Against the backdrop of this volatility, gold had a strong week as did iron ore,” he said.

“On the flipside, it was mostly gloom for other industrial commodity markets such as copper and also for US West Texas Intermediate oil, both of which hit six-year lows.”

The rumbling Renminbi played a role in European equities sharply underperforming their US counterparts, said Lucas.

“The Euro’s greater rise against the Renminbi than the US Dollar left companies with significant exposure to China – such as carmakers and luxury goods groups – which experienced large falls in their share prices.

“Adding fuel to the fire was the release of provisional euro-zone GDP figures, which revealed that growth lost some pace in Q2. Indeed, the region’s 0.3 per cent expansion was weaker than the consensus forecast and also the previous two quarters.

“On an individual basis, Germany’s GDP rose by 0.4 per cent reflecting a particularly sharp rise in exports. Whilst Italy’s GDP rose by 0.2 per cent marking the first time its economy has expanded two quarters running since mid-2011.”

The French economy, on the other hand, stagnated as investment fell and consumer spending barely rose.

About Instreet

Instreet is an independent investment house that works closely with the financial adviser community to conceive and distribute retail investment products. After identifying adviser needs and market trends, Instreet builds customised investments sourcing quality wholesale providers. By doing so, Instreet makes institutional assets available to individual investors. The end result is a range of investment solutions designed to better achieve the goals of clients and advisers.

For more information: www.instreet.com.au

Contacts:

Instreet: George Lucas – 0418 202 228

Email: glucas@instreet.com.au

Shed Media: Simrita Virk – 043 4531 172

Email: svirk@shedmedia.com.au

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