The verdict on China’s recent currency devaluations differs depending on to whom you listen. To some, the devaluations are either a positive and responsible step in the direction of a more market-determined exchange rate and a liberalised financial system. To others, they are potentially destructive; beggar-thy-neighbour competitive devaluations intended to prop up declining GDP growth by unfairly boosting exports.
When China engineered a mini-devaluation of the yuan in August, it succeeded in closing the prior gap between the fix (central reference rate) and the spot onshore yuan. One of the prices of doing so, however, was the widening of the gap between the onshore (CNY) and offshore (CNH) yuan.
There are three key developments today. After seemingly spending recent months pursuing a controversial political agenda, Japan’s Abe has returned his attention to the economy to propose corporate tax cuts. This lifted the Nikkei a stunning 7.7%. The UK industrial output and trade figures disappointed.
According to Dan Steinbock, the internationalisation of the renminbi is accelerating. The inclusion of the yuan in the IMF basket of reserves is now a matter of time.
On August 11, the People’s Bank of China (PBOC) adjusted the exchange rate of the Chinese renminbi (RMB) against the US dollar to reflect market conditions. The net effect was a devaluation of 1.9% relative to the dollar.
The US dollar has been on a roller coaster ride. Many have lost confidence in the underlying trend. An important prop for the dollar, namely the prospects for the Fed’s lift-off, extends again, this time ostensibly due to the heightened volatility of the financial markets, apparently sparked by events in China.
The September Fed funds futures have nearly fully priced out the risk of a hike next month. The effective Fed funds have traded 14-15 bp this month, and the September Fed funds contract implies an average effective rate of 17.5 bp next month.
East Asian financial cooperation is at a crossroads. The Chiang Mai Initiative Multilateralisation (CMIM) and its surveillance unit — the ASEAN+3 Macroeconomic Research Office (AMRO) — are continuing to grow in size and importance. But the structure of these two entities must change to accommodate this growth.
US 10-year Treasury yield has risen 30 bp since Monday’s low water mark. There are a number of reports that are trying to link the back up in US yields to sales by China. The Chinese sales, in turn, link to its efforts to stem the decline in the yuan.
China may indeed have sold Treasuries. Bill Gross at Janus apparently suggested this is the case in a tweet he sent earlier this week. Reporters have been keen to follow the lead. Some media accounts intimate that China had notified US officials of their intentions.
The redback’s managers excel in catching the currency markets off-guard. In January 1994, China unified its dual exchange rate system by aligning the official rate to the market rate and pegging the yuan to the dollar tightly thereafter. Since 85 percent of yuan trades occurred at market rates at the time, the de facto overall devaluation was a mere 5.25 percent — not the 35 percent that is commonly (mis)quoted.
The gyrations in the foreign exchange market spurred by the panicked response to Chinese machinations may have been the last spasm before the summer doldrums grip the dollar. The Dollar Index had its worst week in nearly two months, but all that really happened was a move to the lower end of its ranges. The recent string of US economic data suggest that Q2 growth is closer to 3.0% than the 2.3% of the most recent estimate, and that Q3 has begun on firm footing.
The tax treatment of digital currencies is a challenge for governments around the world, as it is for other aspects of the “disruptive” digital economy.
In October 2014, the Commonwealth Senate Economics Committee launched an inquiry into digital currencies. The Committee released its report last week, with a particular focus on tax. Last year, the ATO published several rulings outlining how bitcoin and similar cryptocurrencies should be treated under the Australian income tax and GST regimes.
