The currency war in the global financial system has been going on at varying strengths since 2009, and in full gear since 2013 thanks to Japan and Abenomics. However, with the world’s most important industrial economy showing signs of a severe crash, or at the very least an acute slowdown, China’s new devaluation policy is expected to ratchet up the currency wars to a whole new level.
For years the Chinese Yuan has been pegged to the dollar, and has ebbed and flowed as the dollar both collapsed between 2008-2009, and strengthened to its current level of 96 over the past year. But with deflation and a slowdown in consumer spending signalling that the world is now in a new recession, China had to act to protect their lifeblood of production against a myriad of economies that have already devalued their currencies multiple times in the past three years.
How The Renminbi Devaluation Will Impact India
1) The Indian rupee slipped to a two-month low of 64.26 against the US dollar on Tuesday tracking the devaluation of the renminbi. Other currencies such as the Australian dollar and the South Korean won also lost ground.
2) The over 0.5 per cent fall in the rupee weighed on traders’ sentiments, resulting in a drop in equity markets. Both the BSE Sensex and the Nifty traded with 0.4 per cent losses.
3) According to SV Prasad of Chime Consulting, renminbi’s devaluation may push the Reserve Bank of India to cut interest rates in India. Lower interest rates will put off foreign investors and will further weaken the rupee, he added. – Profit NDTV
And added to India are the two nations of Thailand and Russia.
Then there is Thailand, where the senior executive vice president of the Stock Exchange of Thailand, Pakorn Peetathawatchai, said that “China is a very important market and a weaker yuan makes our exports there more expensive.” He added that weaker yuan also increases travel costs for Chinese tourists.
Well, yes, it’s called “war” for a reason.
Finally, there is Russia whose economy is already in a tailspin now that the dead cat bounce in oil has ended, and where moments ago RIA said that the Yuan devaluation puts pressure on RUB, other EM currencies. Still, the Russian Economy Ministry sees no domestic factors for ruble devaluation, RIA adds even as it admits crude prices to stay under pressure in 2015. – Zerohedge
For the U.S., China’s devaluation has all but scuttled even the remotest possibility of an interest rate hike for the rest of this year, but in all honest we never expected a rate hike to occur anyway because of compounded leverage on all bond instruments, with this new move by China allowing the Fed another excuse to avoid ending ZIRP.
Currency wars are almost always the first step in a three part evolution where countries throw out any modicum of a free and fair market, and impose a ‘beggar they neighbor’ trade policy. But once a currency war becomes expanded to include several industrialized nations, the final two phases are that of trade wars, and inevitably hot wars.
And all one has to do is look at Yemen, Syria, and Ukraine to realize the hot wars have already begun.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.