The financial world is changing fast. In recent times, equity and commodity markets have seen big moves mainly to the downside but many currencies have also weakened particularly vis-a-vis the US dollar. These moves have occurred for a variety of reasons and are certainly taking their toll on investor confidence.
Many regions and countries are struggling to recover from the 2007-9 crash and have opted to weaken their currencies in a bid to boost exports and competitiveness – the Eurozone and Japan are examples – while closer to home sterling has fallen in recent months on concerns about Brexit.
Other countries have seen their currencies driven significantly lower due to deteriorating economic fundamentals; particularly commodity producing nations whose finances have been undermined by the collapse in commodity prices. The currencies of Australia, Brazil, Canada, Russia, and South Africa have suffered more than most.
Many emerging market currencies have also seen declines including India, Indonesia and Mexico on concerns about global growth and others such as Egypt, Syria and Turkey for geopolitical reasons. There are even concerns that oil producing nations in the Middle East may seek to revalue their currency peg against the dollar so that each dollar of oil revenue converts into more local currency.
The common theme is one of US dollar strength and this is starting to impact the US economy – one of the few actually growing at 2-3% per annum. The question is, can the US continue to grow in the face of tougher competition from all their competitors who now boast weaker currencies and a lower cost base? Hopefully it can but if the US falters, a global recession is on the cards.
Commentators are especially focused on the direction of the Chinese Yuan. In recent years, the Yuan has appreciated against all currencies including the US dollar and this has wiped out the country’s manufacturing cost advantage. Slower growth has ensued and finally last August this prompted the Chinese authorities to devalue the Yuan in an effort to boost growth.
In the grand scheme of things, China’s initial devaluation of about 3% versus the US dollar was only a small move but the big problem is, it created uncertainty. Equity markets were unnerved and responded negatively with large declines in most major markets and this probably marked the start of the bear market which is now underway. The markets are concerned that this move if continued will allow Chinese companies to grab market share from others particularly at a time when there is little growth to go round.
The Yuan has weakened a further 5% in recent months and although the Chinese emphasised again, at the G20 summit in Shanghai over the weekend, that they do not intend to devalue further, many commentators are not convinced. We better hope that the Chinese economy does not falter; otherwise the authorities may have a change of heart. Any signs that the Chinese intend to let their currency weaken further will undermine fragile financial markets.