It came as a pretty surprising decision, the Chinese government made a decision to devalue their currency, known as the Yuan.
Tuesday saw a 2% percent decline in value, which resulted in the largest one-day decline ever. Wednesday followed with further devaluation.
So what does this mean for the market? It may affect things way beyond our scope of predictability, but here are five very real possibilities to prepare for:
1. The Federal Reserve may delay raising interest rates. So mortgage rates have a chance to stay lower longer.
2. Good for commodity buyers, not so good for commodities. This may further weaken the Chinese economy, especially regarding oil, coal and other commodities.
3. Other countries may be forced to devalue their own currencies. Australia, Malaysia and South Korea, saw their currency fall directly after China’s move. This can also impact the other Asian currencies.
4. U.S. growth may not be affected at all. Even if China’s growth dropped sharply, the effect on the U.S. is predicted to be very minor.
5. China is most likely seeking prestige and longer term stability. China has been pushing to get the Yuan recognized by the International Monetary Fund, even though they have yet to prove that their currency is “freely usable”. The IMF has declined this recognition since 2010.
Even though it’s long term effect is not entirely predictable, it seems that China is trying to withstand some short term pain in order to see long term gain.
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To Your Trading Excellence!
Gary Bozek
